In an earlier post it showed Canada is the most overvalued place in the world based on the price to rent ratio. In this post I would like to define what the ratio means.
The ratio is calculated using the following inputs:
Price of home/annual rent = price to rent ratio
Rules of thumb:
- Price-to-rent ratio of 1 to 15 would mean it makes more sense to purchase than to rent.
- Price-to-rent ratio of 16 to 20 would mean its typically better to rent than to buy, but this is the grey area where a lot would depend on the particular market and situation.
- Price-to-rent ratio of 21 or higher means its much better to rent than to buy