Price Rent Ratio

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Price Rent Ratio equals average home ownership price divided by average annual rent

The Price-Rent Ratio (alternately Price to Rent Ratio, or P/R) is a measure comparing average home prices to average annual rent. It is calculated by dividing average home prices by average annual rent. More specifically:

P/R = Home Ownership Price/(Average monthly rent x 12)

On average, in most major American cities, the P/R ratio fluctuates between 15 and 25. P/R ratios significantly above average are often indicative of a housing bubble.[1]

In this way, P/R is often used as the real estate equivalent of P/E.

Though less common, some real estate investors will use the inverse of the price rent raio, called the "rent to own" ratio or the "rent to ownership price" ratio.

References

  1. CNN.com coverage of P/R ratios, 2007
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