Desjardins Securities cautions that Canada's housing market is looking vulnerable because the buy/rent ratio is high, but not everyone is willing to give the measurement so much credibility.
Canadian house prices rebounded from the recession, hitting a fresh record in May and bringing 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.
In other words, excluding major factors such as taxes and maintenance, homeowners pay about twice what renters pay.
"This is precipitously close to the 2.3x level reached in December 2007 and the 2.5x level reached in 1988, which preceded house price corrections of 13 per cent and 10 per cent, respectively," Ed Sollbach and Deep Jaitly of Desjardins wrote in a research note today.
They added ominously that when the buy/rent ratio hit an "unsustainable" 3.6x in Toronto in 1989, it was followed by a 29-per-cent decline in house prices.
Well, that's one explanation. There's also the fact that unemployment was rising and a spike in interest rates to 14 per cent forced many homeowners to sell under distress at prices they wouldn't have considered a year earlier.
The problem with the rent/own ratio is that half of the provinces control the market through rent control, so that prices can't rise along with the broader housing market. House prices in some Toronto neighbourhoods have gained 30 per cent in the last year, for example, but Ontario limits increases to 2.1 per cent.
"Maybe that's just telling us that rents are just too low," said Gregory Klump, the chief economist at the Canadian Real Estate Association in a recent interview. "I'm not a fan of the price-to-rent ratio because it's so skewed by the fact that rents are subject to rent control."