Hi! Have you ever thought about what the price-to-rent ratio is? And why is it important? Well, in the infographic below, we’ll show you the dynamics of this ratio since 2009 and, of course, give you some thoughts on the topic.
A price-to-rent ratio is the ratio of your home’s worth to how much it would rent for in a given year. This number estimates if you’re better off renting or buying property. The PRR indicates whether homes are fairly valued, or there’s a bubble on the market.
You can measure the price-to-rent ratio by dividing the median home price by the median yearly rent. The formula for the price-to-rent ratio is as follows:
Price-to-Rent Ratio = Median Home Price / Median Annual Rent
The standard understanding of the ratio is the following:
- a ratio of 1:15 or less typically means you should buy;
- a ratio of 16:20 typically means you should rent;
- and a ratio of 21 and more always means you should rent.
And what do we see on this diagram? That in 2009 it was definitely better to rent – and not because property prices were high (they weren’t) but because the rent was very cheap. Since then, after millions of tourists started exploring this beautiful country and online rentals began gaining momentum, the ratio dropped significantly because property prices weren’t growing as fast as rental prices.
After that, the ratio began to grow quite steadily till 2018 showing us that foreign buyers rushed to the market, and their collateral investment “pocket” was deep enough despite rental prices growing as well – with Airbnb starting to heat up the market.
In 2018 the tourist flow was really big, and the ratio again dropped, despite that it was already expected for investors and buying market in general (so the price was growing steadily). Tourists on Airbnb were ready to pay more – so the property owners and new buyers began to feel like the property price should go up.
Since then, the ratio began to grow steadily – despite the coronavirus, more and more people wanted to live in Portugal, so not only the rental property was driving the market but also private housing deals.
Now, the ratio is around 24 for the city center of Lisbon and around 21 for the outside of the center property, which is more suitable for long-rentals.
Nevertheless, this ratio is more appropriate for those who seek rent, property investors should keep in mind that rental prices and property prices are steadily growing because of inflation and great demand from foreign buyers and tourists.
So, the question here is: will the rental price go up faster than the property price? Well, seeing that 2022 is showing us the all-time-record-high number of tourists visiting the country, we would take a bet that the ratio will shortly go down and the returns for investors – up. But don’t wait until it happens – it is always better to act in advance.