Rent/price ratio for English housing sub-markets using matched sales and rental data

Abstract

The ratio between the rental and sales values of residential properties are a much studied statistic in the field of real estate economics. When these values do not keep pace with each other, and in particular when the ratio is low, some commentators take this as an indication that there may be a housing bubble building. The ratios are also of interest to potential property investors. These ratios are commonly computed on aggregate statistics derived from the housing market and as such rarely provide any indication of sub-market bubbles, that can occur with particular property types or regions of the country. In this study use is made of a data set from a property listings company that provides sales and, potentially, rental prices for the same properties within England. From the matching that takes place it is possible to calculate the rent/price ratio for individual properties. A regression model is then estimated to explain how the characteristics of the properties; the nature of their neighbourhood; and their location influence this ratio. The model consistently validates the hypothesis that the more desirable a property or affluent an area, the lower the rent/price ratio. It also begins to illustrate the range of “normal” rent/price ratios that may exist in housing sub-markets. The regression model is then used to provide a map of the geographical distribution of the ratio for England for one property sub-market.