rentvsbuy

A common metric to determine whether it is better to buy a home or continue renting is to use the Price to Rent ratio.

Price of property you think of buying divided by a similar property’s annual rent.

A ratio of less than 1-15 = Better to buy than rent except if planning to live in the home for less than 5 years.
A ratio of more than 16-20 = typically better to buy than rent
A ratio of more than 20 = Better to rent than buy unless planning to live in the home for 15+ years

Example:
$500,000 property divided by $2000 x 12 month rent $24,000 = 20.8
It is therefore better to rent than buy UNLESS you plan to live in the home for a very long time.

This is just a rule of thumb and you must consider many more variables like your cash flow, mortgage amortization, age to retirement and what will you do with the housing cost difference between renting and owning a home, will you invest the funds or just spend them.

We advocate a more in-depth analysis of your personal situation but the ratio is indeed an interesting metric to consider as part of a thorough analysis.

For interest sake, an analysis made in 2012 about the Price to Rent ratio for Vancouver, BC and Seattle, Washington show interesting results. Why Seattle? Because it’s probably the most comparable city to Vancouver: both coastal, with similar populations, climates, culture, lifestyle, natural beauty and incomes.

The average price-to-rent ratio in Seattle it is 14.5. According to the Price to Rent ratio guidelines, buying is probably the better option for anyone planning to keep the home more than a few years.

However, in Vancouver the ratio is a staggering 36.9. Considering that the guidelines recommends renting anytime the ratio is above 20, most rational investors wouldn’t even consider buying here UNLESS they plan to live in the home for a very long time.

Food for thought!  Here is the article and analysis.