Historic House Price vs. Rent Ratio

[DWCAP]

I am no bull, but occasionally I see one or two things they do. (usually just not to the same extent). Now I can be totally wrong, but didnt tax law change in 1997 to allow the deduction of up 500k in housing profits? (250k individual). Taxes on 500k is alot of money, something that would then be plowed into the value of the house.

Also the trend line pre WWII is nice to see, but not as usable as the trend line afterwards because lifestyle is differnet now. The boom in the late 1940’s is due to the rise of suburbia by returning WWII verterans and their starting families. Also, WWII started women in the work force, and while it took 20 years to bloom, the beginnings of it can be traced to lower middle income people deploying the female in the relationship to get a job to raise the standard of living. Nurses, teachers, secretaries, these were all acceptable jobs for women in the 1950’s that were often male dominated previously. Also previous to 1940 most people lived in cities or on rural farms and a car was an unusual thing. People either lived on the land they worked or near the factory/building.
The rise in 1970 can be attributed to the baby boom generation. The first boomers were born in 1946 and take that out to 23-24 years later (marrage and college age) and there is your spike. Demand from one of the largest generations hit the market. The boom in 1997 can be linked to a change in tax rates and demand from the baby boom generations children (1997-1970= 27years old).

None of this explains the giant spike observed between 2000 and 2007. That was loose lending and ignoring risk in lending markets. That will self correct. No generational or immigation shift I know of can explain the 2003-2005 insanity.

[(former)FormerSanDiegan]

First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.

1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.

2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.

[(former)FormerSanDiegan]

First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.

1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.

2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.

[(former)FormerSanDiegan]

First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.

1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.

2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.

[(former)FormerSanDiegan]

First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.

1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.

2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.

[(former)FormerSanDiegan]

First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.

1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.

2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.

[Ash Housewares]

This question stems out of FSD’s post; I was wondering what the method for calculating a GRM is for a given interest rate.

Using the 5% example of FSD above, I reason a GRM of 240 (which seems high) is justified:

annual rent = 5% of price
–>
12*monthly rent = price * 0.05
–>
12/0.05 = price/monthly rent = 240

Is that how people come up with their “rule of thumb” GRM numbers for screening properties?

[Ash Housewares]

This question stems out of FSD’s post; I was wondering what the method for calculating a GRM is for a given interest rate.

Using the 5% example of FSD above, I reason a GRM of 240 (which seems high) is justified:

annual rent = 5% of price
–>
12*monthly rent = price * 0.05
–>
12/0.05 = price/monthly rent = 240

Is that how people come up with their “rule of thumb” GRM numbers for screening properties?

[Ash Housewares]

This question stems out of FSD’s post; I was wondering what the method for calculating a GRM is for a given interest rate.

Using the 5% example of FSD above, I reason a GRM of 240 (which seems high) is justified:

annual rent = 5% of price
–>
12*monthly rent = price * 0.05
–>
12/0.05 = price/monthly rent = 240

Is that how people come up with their “rule of thumb” GRM numbers for screening properties?

[Ash Housewares]

This question stems out of FSD’s post; I was wondering what the method for calculating a GRM is for a given interest rate.

Using the 5% example of FSD above, I reason a GRM of 240 (which seems high) is justified:

annual rent = 5% of price
–>
12*monthly rent = price * 0.05
–>
12/0.05 = price/monthly rent = 240

Is that how people come up with their “rule of thumb” GRM numbers for screening properties?

[Ash Housewares]

This question stems out of FSD’s post; I was wondering what the method for calculating a GRM is for a given interest rate.

Using the 5% example of FSD above, I reason a GRM of 240 (which seems high) is justified:

annual rent = 5% of price
–>
12*monthly rent = price * 0.05
–>
12/0.05 = price/monthly rent = 240

Is that how people come up with their “rule of thumb” GRM numbers for screening properties?

[jpinpb]

FormerSD – Good point about the capital gains tax

[jpinpb]

FormerSD – Good point about the capital gains tax

[jpinpb]

FormerSD – Good point about the capital gains tax

[jpinpb]

FormerSD – Good point about the capital gains tax

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