Sunday Morning Nerdiness: what’s your house’s P/E ratio?

Found this little gem while I was rummaging around looking for historical Case/Shiller data: Forbes explains how to calculate the P/E ratio of your house.

As a very rough rule, price-to-earnings ratios for stocks tend to drift from 10 to 25. It varies a lot between industries – industries with high earnings growth will almost always have higher price/earnings ratios – but that’s a reasonable range to start from. The P/E ratio for the S&P 500 index was about 22.2 at the end of last year.

Equally, you can apply this to your house – just think of the “earnings” as being the net rental income. A house with high rent growth would have a higher price/earnings ratio; a house in an area where rent growth is stagnant would have a lower price/rent ratio and a lower outright price. But in theory, the P/E ratios should be roughly comparable to stocks, otherwise people would sell their houses and invest the money in stocks.

A couple of sample numbers from my favourite metropolises (metropoli?), assuming that maintenance and fees eat up one-third of the gross rent:

You’d think twice about buying a stock with a P/E above 40. So why would you buy a house with a P/E above 40 and take on 5x leverage to do it?

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