This is the kind of metrics that scream housing bubble. And keep in mind rental prices are more sensitive to monthly data because you are paying this amount out of your net income. No tax breaks, toxic mortgages, or any other gimmick. One simple rule when evaluating real estate is trying to figure out a home price based on rental income. One I use is the following:$2,250 x 12 months x 10 = $270,000
We're currently renting, and the owner has had the place valued three times in the last 3 months (he's re-financing). We know what the valuers think the place is worth - we asked them.
I ran the above equation on our rent, and compared it to the valuer's estimation.
According to the above equation, either we are paying less than 1/4 the rent we should be, or the place is over valued by a factor of 4.5.
The price would have to fall 78% to bring it back in line with what it is renting for.
Ouch. Bubble anyone?
That is a bit simplistic. There is no direct relationship between rental price and house price.
Most owners would use a measure like "Rental yield", which is a % of the purchase price. So, buy a $500,000 house and get $25,000 rent per year, your rental yield is 5% (which is pretty good). If the rental yield drops down below about 3% then it starts becoming a loss making venture (which maybe the owner is happy about - negative gearing for future capital gain)
So, say the owner paid the $500,000 and got a yield of 4%. 5 years later the place gets revalued at $1million. Yes, the yield has halved in theory, but the owner didn't pay $1million. That is his/her capital gain if they sell the place.
It is basic supply & demand. Nobody has been building new housing stock in Sydney, but lots of people want to live here. Result: house prices go up!
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