Shouldn't price/rent ratios reflect prevailing rates of return in the economy? After all, it is just the inverse of the yield.
Also, I didn't really get the logic of why higher rents mean lower yields (higher price/income ratios). What stops people from selling those low yield places and buying in higher yield places and in the process equalising the yields?
Basically, think of it this way. The stock of homes is a bundle of structures, with a price/rent ratio of 12x and land, with a price/rent ratio of 36x.
Where the value of a home is from the structure, the P/R will be 12x, and as the value of a home is derived increasingly from location the P/R will approach 36x. The P/R of the bundle we call a "house" will rise while the P/R of each component of the bundle are stable.
This is what has happened in the US since 1984. The increased rental value of homes over the last 40 years has mostly been from increased land rents.
Is the Austin market one where the increase in rental supply is contributing to falling home prices? I'm curious if the trendy city phenomenon is something that always existed. It seems a city becomes buzzy, hits the top of the Case-Shiller index, buildings go up, and then it becomes oversupplied, at least temporarily.
I would argue that in the short term, changes in demand are moving prices much more than supply. Both Phoenix in 2004-2008 and Austin in 2021-2025 had big spikes in migration that then quickly dissipated. The strong supply response in Austin has a moderating influence on local rents and prices, but it is more of a slow twitch effect while demand can be fast twitch.
A decline in the "real" home prices could be caused by forces currently not in place in this world. A few I can think of are a Thanos style snap, a more deadly pandemic, a grotesque escalation in deportations, or a massive increase in supply. Of those, I put the lowest probability on a supply increase over the next decade.
I have come to realise economists use various markers of “soundness” way more than they should. Also, one wonders if they subconsciously apply “complete information” models to themselves too much: “if that was wrong the collective we would have noticed” when they bear little or no cost to being wrong in company.
Shouldn't price/rent ratios reflect prevailing rates of return in the economy? After all, it is just the inverse of the yield.
Also, I didn't really get the logic of why higher rents mean lower yields (higher price/income ratios). What stops people from selling those low yield places and buying in higher yield places and in the process equalising the yields?
Basically, think of it this way. The stock of homes is a bundle of structures, with a price/rent ratio of 12x and land, with a price/rent ratio of 36x.
Where the value of a home is from the structure, the P/R will be 12x, and as the value of a home is derived increasingly from location the P/R will approach 36x. The P/R of the bundle we call a "house" will rise while the P/R of each component of the bundle are stable.
This is what has happened in the US since 1984. The increased rental value of homes over the last 40 years has mostly been from increased land rents.
Is the Austin market one where the increase in rental supply is contributing to falling home prices? I'm curious if the trendy city phenomenon is something that always existed. It seems a city becomes buzzy, hits the top of the Case-Shiller index, buildings go up, and then it becomes oversupplied, at least temporarily.
I would argue that in the short term, changes in demand are moving prices much more than supply. Both Phoenix in 2004-2008 and Austin in 2021-2025 had big spikes in migration that then quickly dissipated. The strong supply response in Austin has a moderating influence on local rents and prices, but it is more of a slow twitch effect while demand can be fast twitch.
A decline in the "real" home prices could be caused by forces currently not in place in this world. A few I can think of are a Thanos style snap, a more deadly pandemic, a grotesque escalation in deportations, or a massive increase in supply. Of those, I put the lowest probability on a supply increase over the next decade.
I have come to realise economists use various markers of “soundness” way more than they should. Also, one wonders if they subconsciously apply “complete information” models to themselves too much: “if that was wrong the collective we would have noticed” when they bear little or no cost to being wrong in company.