I came across this chart on Bloomie this morning: its their Rent to Price Index, which compares the median asking sales price vs asking rent. It’s sourced from the US Census Bureau and also includes a housing affordability index, which I’ve removed because I want to ask some questions about the dynamic between renting and buying:
The divergence since the 2007 top in US house prices is very clear, with rents stabilising and forming a large gap to house prices.
Is the current divergence meaning house prices are too low or rents fairly priced? Remember, 30 year mortgages in the US (which are mainly fixed) are at near record lows – just 3.88%! For comparison, the average standard variable mortgage rate in Australia is 6.7%
Next, look at the surge in rental costs from 2001 onwards, which diverged during the housing bubble, before prices caught up – are surging rents are sign of house bubble? It would appear so in New Zealand at least, a market worth watching to see what happens when a government tries to re-inflate house prices whilst curtailing land releases.
Finally a third question rises: why did this relatively stable market (from 1990 to 2000 rents and sales prices were both on similar trends) explode so suddenly from 2001 onwards? I think a thorough reading of the Unconventional Economist’s work on the US housing bubble is required reading.
Australian property bugs need to take heed of these rent/buy dynamics, as again, its the volatility and reflexivity that drives markets, not necessarily the magnitude of price changes.