Mortgage Versus Rent Price Analysis
November 19, 2008
– Comments (7)
Calculated Risk had a post about falling rents, and I immediately remembered a research paper out of the University of BC which I took one look at and my first comment was that the research was poor.
The paper was estimating a modest decline in prices in Vancouver of 7 to 11%.
Go to page 2 and you see that Vancouver is by far the most expenisve city in Canada and from living there I know that wage have not kept up even marginally. The cost of a home in Vancouver is beating the next highest city by a freaking $300k. When I was in Vancouver my household income was in the top 20% of household incomes and I know that if I was starting out having to pay $300k for a whole home it would be tough even being in a category where 80% are making less.
What they did to justify their position was compare prices to rents, and there is no question there are some pretty steep rents in parts of Vancouver, like $1200 for a one bedroom condo. I question if they looked outside of Vancouver.
But, my first comment was that rents weren't sustainable relative to income and with the glut of construction vacancies would be going up and rents would be coming down. So, a 20% decline in rent, which isn't unreasonable at all when you consider that rents are a way out of line with wages, would give more like a 30-35% decline in home prices with the research method used.
Far to often when I look at research the authors have chosen to ignore one of the most important variable and they come to insane conclusions.
Anyway, when I was in Vancouver in the summer I noticed the insane level of construction happening that reminded my of my visit to Florida in the summer of 2006 and Las Vegas in June of 2007. A glut coming onto the market pushes prices down. People who have committed to buying are motivated sellers. A few job losses and you get young people moving back with parents, or people renting out rooms in their homes and that simply puts pressure on rents to come down.
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