Home buying, when utilising credit, remains attractive relative to rental for now, but may become gradually less attractive as interest rates rise, providing mild upward pressure on rental inflation.
One of the key ratios watched by property analysts for signs of an “over-valued” residential market is the Price/Rental ratio.
The reasoning goes that the higher the property price relative to the going rental, the more attractive it becomes to rent rather than to buy. Therefore, the higher the Price/Rental ratio becomes, the less the demand for home buying and the more the desire to rent. Ultimately, this should lead to a downward correction in house price levels, or at least house prices in real terms, accompanied stronger rental inflation, which should lead us back to a lower and “acceptable” Price/Rental ratio.