Presenter: Sophia Gilbulkh ( CUNY Baruch College, Zicklin School of Business )
We examine the potential for the price-to-rent ratio to be used as a macroprudential tool. Standardized appraisal methods, such as the comparable sales and replacement cost appraisal are not designed to identify speculative housing markets. In addition to these methods, appraisers could estimate the current market rent for a property. We argue that the resulting price-to-rent ratio would provide a useful signal for speculative pressures. We show this by estimating price-to-rent ratios for home purchases using the American Housing Survey. We document that the distribution of price-to-rent ratios shifted up dramatically during the housing boom with the 75th and 95th percentile reaching a historic peak in 2006 at 22 and 44 respectively. We illustrate how the price-to-rent ratio could be incorporated into a lending policy so as to generate countercyclical loan-to-value ratios.