We’ve been putting in a lot of time studying Toronto real estate prices, and we started to get curious how rents relate to them. After all, buyers and renters must have a relationship, but there isn’t a lot of studies of the impact on rents. Going back to 1992, what we found was real estate prices and rents have an inverse relationship. That is, under normal market conditions.
When Prices Increase, Rent Drops
Toronto real estate prices, and rentals share an inverse relationship for the most part. The greater the rise in home prices, the lower the rise in rents. The most obvious example on the chart is 1997, when home prices rose 6.64%, and rentals moved only 0.2%. In 1998, the trend has a sharp reversal, with rents jumping a massive 7.3%, and real estate just 2.6%. So under normal market mechanics, it’s a clear trend.
Toronto Real Estate Vs. Rental Price Change
Interest Rates and Rental Prices
Note I said normal market mechanics, because there’s a pretty odd break in 2008. That was the year interest rates were aggressively slashed, and fueled cheap borrowing. 2013, the year they tried raising rates resulted in a slight dip. That trend reversed when they cut rates again shortly after. Interest rates then proceeded to drop to the lowest levels in history, pouring gas on scorching hot home prices to jumpstart the economy.
Expected Rate Increases Later This Year
Since the trend was broken by interest rate manipulation, will rising rates cause rents to surge? The Financial Accountability Office of Ontario (FAO) is expecting rates to rise by year end, which is likely to kill soaring home prices. If rates are no longer at an artificially low level, rental rates should rise, at least according to historic trends.
Under normal circumstances, the market makes absolute sense. Prices rise until buyers can no longer support them, at which point buyers become renters. Likewise, when there’s a rush to rent, home prices fall and it becomes more attractive to buy. Fueling market manipulation with artificially low rates, has had peculiar consequences as more people that typically couldn’t afford a home can overnight. Will correcting this trend of super cycle buying result in a super cycle of rising rents?
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[…] We analyzed over 20 years of real estate prices, and rents. What we found is historically rents rise when real estate prices are weak, and real estate prices are weak when rents rise. With anecdotal evidence that rents are rising in Toronto, what does that mean for real estate prices? Read the full story. […]
As a Toronto top Realtor of 27 years, I am so sick and tired of the same things over and over in the media bout the Toronto Real Estate Market. Simple true facts are so much more valuable, even for a professional. Nicely done.
for chines and Indian people Vancouver and Toronto property prices are dirt cheap with far far better quality of life for example 2 leading city of china and India total Canada countries population is equilent to this 2 city of chian and 2 city of india shanghai and bijing where price to rent ratio is average 55 and affordability index is far below then this 2 Canadian city same ratio in Indians mumbai & New Delhi this 2 city population = canada total population here also price to rent ratio is 50 to 55 and affordability is very low with very low quality of life so Chinese and Indian people going to flood this Toronto & Vancouver market
Canada should make it difficult for any foreigner to own any form of property here; this is a well known practice in the rest of the world.
Kaitlin and others–great site. Great pieces. However…
Could you include footnotes (or something) to indicate the source of many of the (contentious, contrary) stats you include in your pieces?
[…] No one can tell the future with 100% certainty. However, big money investors use well-established models like these to make decisions. The fact that decisions are made on these numbers by such a large group of people, likely does make it a self-fullfilling prophecy in my humble opinion. We’ll be running more complicated models in the future. If you’re in Toronto, you might want to brush up on the inverse relationship between rent and home prices in the meantime. […]
[…] No one can tell the future with 100-per-cent certainty. However, big money investors use well-established models like these to make decisions. The fact that decisions are made on these numbers by such a large group of people, likely does make it a self-fullfilling prophecy in my humble opinion. We’ll be running more complicated models in the future. If you’re in Toronto, you might want to brush up on the inverse relationship between rent and home prices in the meantime. […]
[…] No one can tell the future with 100-per-cent certainty. However, big money investors use well-established models like these to make decisions. The fact that decisions are made on these numbers by such a large group of people, likely does make it a self-fullfilling prophecy in my humble opinion. We’ll be running more complicated models in the future. If you’re in Toronto, you might want to brush up on the inverse relationship between rent and home prices in the meantime. […]
LOL… the rent prices in Toronto rose over 30% back in March, the same time as the housing prices so not sure about the model presented, but the rental market is a lagging indicator. Our real estate market is not normal, hence I would expect both to decline due to simple lack of affordability and China’s capital controls. Unemployment rate is high and we have influx of immigration (including refugees) not reported in our unemployment numbers… It is going to be a disaster at the end of this year; slower real estate market, winter in the country (Montreal’s Olympic Stadium shelter for 150 refugees coming daily this month)…