Rents as an indicator of property prices

Ronan Lyons the respected DAFT.ie economist has today produced a very helpful calculator to help residential property buyers in their rent-v-buy decisions. You can find the calculator here. There may be some bugs to iron out though Ronan has also produced a google docs spreadsheet which set out the full workings and you can find a link on his post also.

Having run a number of computations based on actual asking prices and rental prices from DAFT.ie, the picture that emerges to me is that either property needs to drop substantially or rents need rise substantially to get to the point where the rent-v-buy economics get into equilibrium. With a potential review of the Rent Assistance program by the government and  falling wages (mainly referring here to the Governor of the Central Bank seeking a 20% reduction in wages from a speech earlier this year to restore competitiveness) it is hard to see how rents will rise unless there is a societal acceptance that rents are presently pitched at too low a level.  In simple terms therefore it would seem that a further a property correction is more likely if the economics of buying-v-renting are paramount and if there is to be an economic balance. David McWilliams writing in today’s Independent echoes this point by proposing that the average home has to see a 45% drop  before the rent-v-buy decision comes into equilibrium. The graphs referred to in David’s article should become available here.