October 18, 2010
So there’s this whole discussion about the rent/buy ratio in the real estate world. Basically, it compares the costs of renters to those of owners. When they become very misaligned, it usually indicates that the housing market is out of whack.
According to the Globe and Mail:
Canadian house prices rebounded from the recession, hitting a fresh record in May and brining the buy/rent ratio to about 1.85x. That means that mortgages are increasingly difficult to afford compared to rent, as house prices increase and rents remain stable.
Uh-oh, right? Wrong! While the rent/buy ratio was frighteningly high before the last major plunge in 1989 (3.6x in Toronto), that doesn’t mean that we’re due for another 30% devaluation.
Here’s the reason. Rent isn’t allowed to increase very quickly. Many provinces control the rate with which rent can increase. Quebec has some pretty intense rent control laws. In Ontario, landlords can increase their rent at a rate of 2.1% per annum. With some areas of Toronto experiencing 30% gains in the past year, it’s no wonder rental costs hasn’t been able to keep up.
Essentially, rent isn’t subject to the same laws of supply and demand that home values are. I don’t want to sound like a government hater, because I’m not. I think there is definitely a place for rent control laws in our country, but it might not be the best predictor for a real estate crash.