Canada's Housing Bubble

Analysis of the real estate bubble in Canada -- http://CanadaBubble.com

Global Real Estate Ratios Show Extent Of Bubble Print E-mail

November 13th, 2008 www.tradersnarrative.co

Real estate, as an asset, derives its value from two sources: personal income and rents. The first makes it possible for an owner occupied property to be purchased while the second allows for an investor to purchase real estate.

The following charts show the relationship between real estate prices and these two variables:

real estate price to income ratio oecd data

real estate price to income ratio oecd data

real estate price to rent ratio oecd data

real estate price to rent ratio oecd data


real estate price to income ratio oecd data

The data is normalized with 100 being the long term average. Here are some quick take aways:

  • Japan’s real estate continues to slide into an abyss
  • US housing market doesn’t seem so bad now, does it?
  • not surprised to see Spain at the top but am surprised at Canada being second
  • data hides a lot of regional disparities - for example, within the US, Florida and California would trump Spain
  • Ireland is ahead of other markets in correcting - but it also started earlier
  • Mr. Greenspan, what happened around 2000? seems to have been an inflection point there

You can check out the OECD report yourself to get the full details. There are many more countries included but I didn’t show them because the charts would have gotten too busy. In any case, they were either too small as an economy or the data was at neither extreme so it wasn’t interesting. Look in the free resource section for the full spreadsheet.
 
Related Information

Comments  

 
+1 # Cheap 2009-11-29 17:00
A valuable number in real estate investing is the price to rent ratio, which is simply the purchase price dividend by the rent received. For example, the condo I purchased for $126,000 and rent for $1,300 / month would have a Price-Rent Ratio of 96.9 (monthly) or 8.08 (annualized).

The annualized ratio is comparable to the P/E of a stock (for which 8.08 is considered quite good!).

The only real problem with this approach is that you can’t really look up ratios for different areas easily. For example, what’s the average Price-Rent Ratio for Toronto? I have no idea! I’d love to know if Kingston or Waterloo have a better Price-Rent Ratio, but that’s not something I can easily look-up, unfortunately.

If you COULD determine this Canada-wide, a community with a very low Price-Rent Ratio, a decent population size and a low vacancy rate (say under 5%) would be an EXCELLENT place to purchase / build rental properties (the other info can be easily determined).

People sometimes talk about properties being cash-flow property from day 1 with 0% down, and I can’t imagine that very many deals like this are possible! As I’m writing this, I did some calculations. Given the fact that my property is $250 cash-flow positive. At the interest rate I’m paying (5.05%), the property could afforded an additional $250 / month in interest, which means I could have afforded to borrow another $59,405.94 (250*12/5.05%). Since I’ve put less than this into the property, if I could somehow have gotten the interest rate I got with 0% down (say with a VTB or something), I could have had this property cash-flow positive with nothing down, so I guess it IS possible.

Neat.
Reply | Reply with quote | Quote
 
 
+1 # Suki 2010-03-06 07:41
You wouldn't want to compete a stock P/E to a real estate Price to Rent ratio, because real estate cashflows do not include depreciation, amortization, or income tax expenses that a stock P/E does.

And comparing real estate price to rent, to stock price to EBITDA isn't appropriate either unless the nature of the underlying assets is similar.

People in general tend to massively under-estimate the effect of future taxes on their property, and the cost of maintenance, when they do their calculations.
Reply | Reply with quote | Quote
 
 
0 # Cheap 2009-11-29 17:03
The price-to-rent ratio is the ratio of residential real estate prices to the annual rents that can be earned from the real estate.

Price-to-Rent Ratio = Real Estate Price / Annual Rent

The price-to-rent ratio can indicate whether home prices are rising or falling or the desirability of owning rather than renting. The average ratio for 1987-2007 has been about 15 (source: Home Prices Seem Far From Bottom), meaning that home prices were 15 times the annual rent that could be earned from the homes. During the real estate bubble 2005 - 2007, the price-to-rent ratio increased to more than 20 times in some areas.
Example—Calcula ting the Price-to-Rent Ratio

If a residential home cost $200,000 and rents for $1,000 per month, what is its price-to-rent ratio?

Annual Rent = $1,000 x 12 = $12,000

Price-to-Rent Ratio = $200,000 / $12,000 = 16.67
Reply | Reply with quote | Quote
 
 
0 # Gordon Cavanaugh 2010-02-19 09:33
The price to rent ratio in real estate is called the Gross Rent Multiplier. It is a crude method that at best can be used as a cross check to a property's value for typical urban homes only. The multiplier is NOT a good method to compare one urban area to another, because the expenses for each area are quite different. Heating costs in Ottawa are not the same as Vancouver, nor are the taxes.

Want to know more. Call a Real Estate APPRAISER
This is what WE do, everyday.
Reply | Reply with quote | Quote
 

Add comment


Security code
Refresh

Latest Articles

Latest Comments

You can help

You may help and contribute by posting your thoughts and adding comments to all articles. The Forum actively encourages your voice at any time.  All opinions are appreciated.

Latest Charts

Popular

You are here  : Home Bubble Articles Global Real Estate Ratios Show Extent Of Bubble