The price to rent ratio: A macroprudential application

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 priceto-rent ratios shifted up dramatically during the housing boom. We illustrate how the price-to-rent ratio could be incorporated into a lending policy so as to generate countercyclical loan-to-value ratios. These represent the views of the authors and not necessarily the views of the Federal Reserve Bank of New York or the Federal Reserve Bank of Dallas We thank Rachel Schuh and Noah Kwicklis for their expert research assistance.