The NBR has pointed to an article to the Economist that shows house price to income and house price to rent ratios – pointing out that the very high house price to rent ratio can be used as an indicator that the return on housing is very low/house prices are heavily overvalued.
Now one criticism that people may raise is that the “quality” of the housing stock and the rental stock has changed – and so the relative prices/spending from income could indeed change. However, the Economist uses figures from Quotable Value New Zealand (as well as Stats NZ) – and so the quality of housing is in fact taken into account in these indices! [Note: It is not necessarily clear the categories are comparable – so this argument could still be used]
As a result, we could say that this is true – the return for an investor in the housing market seems pretty low.
But what else can we tell from all this? Relative to historic averages, the price to rent ratio is 68% higher, and the price to income ratio is 20% higher. So this implies that price/rent is 168% of its average, and price/income is 120% of its average … which tells us that rent/income is 71% of its long-run average. If we believe these figures, the rental cost … the cost of actually consuming a housing service relative to income … is very low! [Update: So this is consistent with rising living standards, and having to spend less on housing services – a nice foil to all the suggestions that housing costs have been eating into incomes!]
I’m not sure how much I trust these figures overall, price to rent ratios in this index has been rising constantly over the last 40 years implying that there may be a “quality adjustment” issue in the data to me.
However, if we do use these figures to say that house prices are too high – they also tell us that rents are too low. Any explanation we have needs to explain both of these parts of the data. [Update: This is not clear from the data – and is actually a misleading statement, so just ignore it. In truth, we need to ask how much of the adjustment will occur through rents and how much through prices]