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VancouverGuy

Price-to-Earnings ratio - where did your bubble peak?

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Now that most major global bubble cities have past their peak and entered into the correction phase, I'm curious where everyone's particular local bubble peaked in terms of the price-to-earnings ratio?

For those who don't know how to calculate it ... you take the price of the particular asset (ie: house), and divide by the annual earnings that the asset produces (the rent). Price is easy enough to determine, but earnings will be more dependent on local circumstances. For example, rents in my local area always include Municipality Taxes, so a good rule-of-thumb is for annual "Earnings" to be 10x the monthly rent (the extra 2 months are usually accounted for by Municipality Taxes, Insurance & Maintenance). This may not be the same in your area.

For simplicity, I generally ignore the effect of leverage in the calculation. Indeed, if I include leverage (assuming a 75% mortgage), then yields are usually negative and any concept of "Earnings" are lost.

I also ignore the tax that would be paid on the earnings, to maintain the comparison with other common investment vehicles (stocks, bonds, etc...). I also exclude any one-off transaction costs involved (lawyers, agents, home inspections, Stamp duty or similar) for the same reason.

For comparison, in the late 90's tech bubble the NASDAQ peaked at around 200 PE, the Irish real estate bubble peaked at about 90 PE.

So, where did the bubble peak in your area? Please state City and Price-Earnings ratio at the peak.

Let's get started:

        Vancouver - 78

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In my area of London.....30

3 bed house. Turn living room into another bedroom and convert kitchen to kithcen/loung

Rental income say 2,400 a month (generous). price 700k.

 

With 10% deposit and 4% mortgage, repayment is 3,200 a month.

 

Edited by 999house

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In London, I know of a case where the flat would be valued at 850k, and the rent was £1300 p/m - private sector. The landlord could have a lot more, but they were happy enough with the 'solid' renters so it gives 

800/(1.3*12)

London = 51. 

I thought that was nuts but the vancouver number is jaw dropping! 

In Cambridge, my local area, it would be around 30, which is where I think the London number would also be if the landlord was to remarket.

 

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3 hours ago, Frugal Git said:

In London, I know of a case where the flat would be valued at 850k, and the rent was £1300 p/m - private sector. The landlord could have a lot more, but they were happy enough with the 'solid' renters so it gives 

800/(1.3*12)

London = 51. 

If going by the formula given above (subtracting 2 months for taxes and maintenance) it would be a bit more like:

=850000 / (1300 * 10)

=65.38

Obviously, if the flat is share of freehold and has much lower service charges and ground rent then the formula might show lower P/E.

If we say the landlord only spends one month's rent on taxes and maintenance, but we do add stamp duty "as a second property" to the price it would be quite similar:

=(850000+58000)/(1300*11)

=63.5

Obviously the above only applies to landlords who are cash buyers.

Presumably for BTL the 'price' would be the total cost of the mortgage plus stamp duty, which would produce even crazier high numbers, i.e. total cost of mortage at £958,099 (on loan of £600,000), plus deposit of £250,000.

=(958099+250000+58000)/(1300*11)

=88.54

Though I would suspect that £1300 rent on a £850k flat is an extreme example for London.

Edited by The Young and the Nestless
had missed deposit from BTL calc

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