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What would be price/annual rent ratio be if interest rates were 0%?
2013 Feb 25, 6:40am 991 views 5 comments
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15-20 x annual rent,,,,
I guess it depends on what your definition of "fair" is.
Japan has 0% interest rate.
Real Estate dropped last 10+ years.
It is all relative.
If the asset is already overvalued, factored in, etc, you will not gain anything.
curious2
2013 Feb 25, 9:50am
Life expectancy of the buyer is irrelevant. Life expectancy of the house or apartment building, i.e. depreciation, would matter. Maintenance costs and property taxes would also matter, as well as the level of service provided. The buyer pays for inflation protection, independence, autonomy to re-model or replace, etc. The renter pays for avoiding the risk of depreciation, and for the convenience of not having to do all the maintainance, and commonly for the inability or unwillingness to save up a down payment or tie up capital. (But 97% mortgages and no-money-down deals "solve" that last problem by turning even paupers into debtors.) Also many service costs, from trash removal to apartment building doormen and gyms, influence the price/rent ratio if they are paid by owners and passed along to tenants.
if they give me 0% interest only for life, I'll buy everything at any price.
Has to be interest payment only for the life of the loan and balloon payment at the end. Gives "die broke" a new meaning. LOL!
- monthly mortgage payment would still be bound by monthly income.
- calculation of the monthly is identical to calculation of regular non-zero interest payment; you'd just use a zero percent interest rate
- all else equal, this would increase house prices since payments are lower and people would just bid up the price.
-assuming $0 down to simplify calculations:
* $1M @ 3.65% = $4575/month
* $1M @ 0% = $2778/month; which is equal to $600k @ 3.65%.
in other words borrowing $600k @3.65% 30 year fixed is the same payment as borrowing $1M with a 0% 30 year fixed.
There have been numerous discussions on this site about relationship between interest rates and home prices. I think most of us would agree that in vast majority of cases, all things being equal in macroeconomy that lower interest rates should result in higher home prices since "affordability" increases via lower costs of servicing the debt. It is also widely believed that historically a "fair" range for price/annual rent ratio is 15-20 annual rents. However, what would this ratio be if someone for example could pay back the principal over a 30 year period without paying a cent in interest? Would the following formula work for house prices: median remaining life expectancy/divided by current annual rent for existing buyer pool. Example: median age of homebuyer is 40. They expect to live to 82. Their current rent is $2500. Thus, the expected price would be is $2500*12*42 = $1,260,000. Essentially, the buyer will be paying for inflation protection under this scenario.
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