Thursday, November 15, 2007

Rents Inevitably Drive Property Prices

The value of an asset is what you can squeeze out of it, not what you can sell it for.

This is why I always recommend to my students that you look at dividends, not capital gains when looking at stocks. And is why I recommend that you look at rents when looking at property, not because the house is painted a nice color or is near a Starbucks.

However, this howdy fine chart from The Economist is interesting in that it not only shows this relationship between rents and property prices but shows you nearly a decade of decreasing property prices as rents were decreasing as well.

Fortunately for the US and other housing bubble areas rents are not decreasing, but rather increasing or at least staying stable. The question is how long of a delay until rents again drive prices back up.

No comments: