Price-to-rent ratio

One of the metrics used by housing analysts, economists and real-estate investors to determine fair value of a house is the Price-to-rent ratio. One of the two simple and sometimes contested metrics (price-to-income is the other).

I think the burst US housing bubble should be a great post-mortem learning exercise for Canadians, especially those active in the housing market (agents, realtors, mortgage brokers, banks, buyers, sellers, etc)

I’ll get to the point now, the chart and summary below (via GreaterFool) shows the price-to-rent ratio globally for the last two decades.

The data is normalized with 100 being the long term average. Here are some quick take aways:

• Japan’s real estate continues to slide into an abyss
• US housing market doesn’t seem so bad now, does it?
• not surprised to see Spain at the top but am surprised at Canada being second
• data hides a lot of regional disparities – for example, within the US, Florida and California would trump Spain
• Ireland is ahead of other markets in correcting – but it also started earlier

Here is a long-term chart of price-to-rent ratio for US

Many US financial/economics bloggers have blamed the government/fed for not reading this very apparent bubble sign among many others.

Where does that leave us? While I couldn’t find a central source of rents across the nation, I put together data from the Toronto real-estate board to come-up with this chart…

Note: I have used a crude way to determine the average rent and price but the focus here is trend, the level is clearly out of whack since early 2000.

When you compare the top graph of global price-to-rent ratios to the one above, I think it can be reasonably deduced that the Price-to-rent ratio has only gotten worse since 2007.

I would really appreciate your thoughts/comments on this topic.