Saturday, November 10, 2007

Housing Affordability - Rising price-to-rent ratios partly justified

A look beyond our standard affordability measure
Our latest housing affordability calculations showed that the proportion of before-tax household income going towards home ownership costs suffered one of its largest and most broadly based quarterly deteriorations in the current housing cycle stretching back to the mid-1990s. While the deterioration spanned every major city, it was the western markets that warranted caution because of the speed and depth of the deterioration.



Our affordability measure provides a rough depiction of trends in wages, the cost of capital, energy prices and tax rates, but it has limitations. It does not directly address whether or not house prices are high today by historical standards and how they compare to local rental options and it does not account for recent financial innovation, such as the introduction of products like extended amortization mortgages.


Another measure that provides an indication of an over- or undervalued market is the price-to-rent ratio that compares house prices to rental costs using the rent component in the consumer price index. The purpose is to compare the cost of buying compared to renting a house. While insufficient on their own to predict market valuations, together the affordability measure and price-to-rent ratios can help assess whether housing markets are inflated.


Rising price-to-rent ratios partly justified
The unanimous trend of rising price-to-rent ratios across every major city in the current housing cycle can be partly attributed to recent financial market developments and innovation. The precise combination of historically low interest rates coupled with significant financial innovation has been a key support in the current housing cycle. Interest rates were on a downward trend through much of the 1990s and have held at very low, attractive rates since the start of the decade, thus helping to fuel housing demand. Financial innovation has also helped to make the market more liquid through extended mortgage amortizations, higher accepted loan-to-value ratios and securitization. In fact, longer amortization products now dominate new mortgages in the insured market and comprise about 25% of total new mortgages in Canada.



Regional disparities behind soaring price-to-rent ratios
National price-to-rent ratios were remarkably stable through the 1990s, indicating a relative indifference between buying compared to renting a home. The result in the 1990s was a significant improvement in affordability right across the country. The tide turned at the start of the current decade and price-to-rent ratios have since increased by roughly 80% nationally. A rising ratio is indicative of house prices outpacing rental costs. These trends are not a consistent cross-provincial phenomenon. Part of the increase in the ratios is attributable to what has become an overheated market out west. However, part is also due to changing dynamics in the market that have made housing more affordable and accessible to lower-income segments.



The bottom line
While financial market trends help explain some of the increase in price-to-rent ratios in central and eastern Canada, they do not fully explain the increases out west. By considering affordability conditions in conjunction with price-to-rent valuation estimates, a fuller picture of the sustainability of current fundamentals emerges. Together, these measures point to evidence of overvalued markets in the west, while markets from Manitoba eastward appear, on balance, to be fairly valued From RBC Economics


Search the MLS or read more about Interest Rates, Power of Sale Properties, Price Trends and more at my website. Homes for Sale


Thank you for reading my blog and if there is anything else I can help you with please don't hesitate to contact me,


Mark


A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate


Thinking of Selling? Best Mortgage Rates Current Home Prices Search MLS
RE/MAX Realty Specialists Inc.

Providing Full-Time Professional Real Estate Services since 1987

( BUS 905-828-3434
2
FAX 905-828-2829 ÈCELL 416-520-1577
E-MAIL : mark@mississauga4sale.com
8 Website : Mississauga4Sale.com


No comments:

Post a Comment