Housing prices vs. rent

I recently had a conversation with an acquaintance who had bought a house to renovate and resell in the Bloor and Ossington area. She mentioned that she was amazed by the price rise in the area, and noted that if she wasn’t able to sell the house, she wouldn’t be able to rent it out for as much as the mortgage would cost her. I made a preliminary attempt to look at the cost of renting vs. buying in Toronto by looking through some MLS listings. The first house, a very large 3 bedroom, is for sale or rent, which makes the comparison easy:

147 Delaware

For sale: $749,000
For rent: $2,400/month

Mortgage payment on sale price, assuming 25% downpayment, 25-year mortgage at today’s prime rate of 6.25%: $3,678/month

Price to rent value: 312 x rent

The second listings are in a townhouse complex near Queen and Bathurst.

TH6-68 Carr St.
For sale: $324,900

TH12 – 68 Carr St.
For rent: $1690/month

Mortgage payment on sale price, with 25% downpayment: $1595/month (+276.98 monthly condo fees)

With 10% downpayment: $1914.50/month (+276.98 monthly condo fees)

Price to rent value: 192 x

Irvine Housing Blog goes through some metrics for assessing a house’s real value, one of which is price to rent. He assumes that closing costs etc. are offset by tax deductions in the U.S., which of course doesn’t work here, so one would think the multiple should be lower in Canada. He pitches the price/rent multiple at 180 to 150 times rent for those buying as a principle residence, and 120-150 for investors. A Scotiabank report shows that growth in house prices is roughly doubling rent increases (and I don’t believe the housing price includes property taxes, which would increase the gap).

There are also other metrics, of course, such as price to household income. Those multiples have grown in Canada as well as in the U.S. in recent years.


The Scotia report also notes that growth in housing demand, like population growth, will slow over the next decade, and what growth there is will likely come most at the older end of the age spectrum, with “late-stage ‘move-up’ buyers and ‘downsizers'” potentially dominating the market. Which leads to the possibility of bond guru Bill Gross’ 1980 “plankton theory” taking hold of the more overheated parts of the urban Canadian real estate market:

We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

One way to measure might be via the Plankton Theory. In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market’s not going to repeat the experience of the past 10 years.”