House prices are falling, but borrowing costs more. At the same time, rents are hitting all-time highs. It can be confusing to figure out if buying or renting is financially advantageous for you—enter the Price-to-Rent ratio.
So, what is it? The Price-to-Rent ratio is a benchmark to determine whether renting or owning a property is cheaper.
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It's a simple calculation: home price divided by annual rent.
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Buying is a good idea if you get a number between 0-15. Renting becomes a better idea if the number is between 16-20. Anything over 20 is not worth buying—a hint that the property is overvalued.
- You can run the calculation with comparable properties in the area to give you an idea of affordability in a particular city.
Let's run the numbers on a three-bedroom townhouse in downtown Calgary for $350,000. Renting the same property at $2,805 a month would bring the total to $33,660 annually.
- 350,000/33,660 = 10.3
Yes, but: While the Price-to-Rent ratio is a good gauge of what the market is like in certain areas, it isn't a flawless calculation.
- It doesn't factor in any expenses associated with purchasing a home, like closing costs, property taxes or maintenance.
Bottom line: The Price-to-Rent ratio is a good starting point to determine affordability if you want to transition from renter to homeowner. But it should be one of many calculations you run.