Canada is not immune from the subprime crisis: Garth Turner
The U.S. real estate crash is about to sweep into Canada, says Garth Turner in a just-published book entitled “Greater Fool.” Turner – the Liberal MP, entrepreneur and real estate investor – says the problems underlying the American subprime crisis “go far beyond mortgage products and also reach into Toronto, Calgary and Vancouver.”
Just as stocks have price-to-earnings ratios (PE Ratios) used to establish relative value, houses have a price-to-rent ratio to establish relative value. Rent is the income or potential earnings a property can produce. It does not matter if the property is rented or if an owner lives in the property. The potential for rent is equal to the potential for earning.
House prices in Greater Vancouver are overpriced and consequently the rental yield on properties is very low. The chart above (click to enlarge) shows the long term detached house price adjusted for inflation, the inflation adjusted rents for a 3 bedroom apartment and the price to rent ratio for the benchmark detached family home (I used a multiplier of 2 on the 3 bedroom apartment rent to represent the benchmark detached rent).
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:
CALGARY - Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada Wednesday, saying there is no bubble and that the subprime-mortgage woes crippling financial institutions in the United States are not threatening banks north of the border.
"There is no bubble in the Canadian housing sector," he told reporters after speaking to roughly 400 people at a Calgary Chamber of Commerce event.
I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.
I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.