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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.

7 Comments – Post Your Own

#1) On November 19, 2008 at 8:19 PM, cubanstockpicker (21.18) wrote:

which are the banks financing canadian pies in the skies?

Another question, As wall street loses their shirts and everything else for that matter, what happens to the Real estate Market in NYC which hasnt suffered a decline at all?

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#2) On November 19, 2008 at 8:46 PM, QualityPicks (32.39) wrote:

While I don't have hard stats, but I have been watching houses for rent in my zip code. My rent was raised 35% in the last 5 years. So I've been looking around as I felt they were pushing to hard to fast. I noticed rents for homes similar to the one I'm renting came down, about 10% in average. However, they went up by 10% the previous year, so it is just like nothing has changed in the last 2 years.

But I was amazed at seeing the rents coming down (at least for now, and for a little bit). Too early to say it is a trend. We'll see.

But that just throws another wrench into the housing market. Every time somebody says that "it could be a great time to buy for some people that can afford their mortgage", I think "Why? if they can just rent the same house for a lot less money while they wait for prices to come down to reasonable levels".

We are told we may be facing the "Great Depression", that everything is so negative, we should buy now. And I say "whoever is saying that doesn't live around here". Around my neighborhood, home prices are very expensive and everybody seems to be driving a nice Mercedez or BMW, except me :) 5 years ago, I used to think I was highly paid, and while I earn 20% more now, I really feel poor now a days :( 

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#3) On November 19, 2008 at 8:47 PM, QualityPicks (32.39) wrote:

"too hard, too fast" sorry for the typos :)

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#4) On November 19, 2008 at 11:30 PM, milpo (44.11) wrote:

We are gradually shifting from an ownership society to a leasehold society.  The same thing happened in Europe approximately 100 years ago.  The cost of renting will go up. Alternatives for housing will be limited.

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#5) On November 20, 2008 at 10:27 AM, MadRussianHobbit (91.91) wrote:

NYC has an additional component which makes analysis of their housing market more interesting: rent control.  Generally rents are below free market levels, which inhibits additional investment in rental properties, which causes shortages of rental properties, which means actual rents are even farther below free market values.....

A vicious circle, which makes all analysis of the housing market in the city fun.

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#6) On November 20, 2008 at 6:51 PM, dwot (29.45) wrote:

cubanstockpicker, I think you are mistaken about the state of the New York real estate market.  I skim the New York City Housing Bubble blog.  Everything that is being reported screams "Timber..."  It is like a sine wave, it is just over the top and expect to see the decline to start snowballing...

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#7) On November 29, 2009 at 11:12 AM, djkumquat (41.06) wrote:

my hometown...

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