1 September 2013
Istanbul’s rising property prices makes renting a more viable option
Renting the home is becoming a more attractive option for consumers than buying it in Istanbul. According to price-to-rent ratio calculated by Reidin, an emerging market real estate research firm, the best time to buy a home was in 2009.
Price-to-rent ratio is a coefficient used to determine how expensive a property is compared to the rent a tenant can ask for. The ratio can be compared to the dividend discount model which uses dividends a stock pays to calculate its price. The home price is divided by 12 times of the last rent to get the price-to-rent ratio. In another words, price of the property is divided by the yearly rent.
According to the common view, price-to-rent ratio less than 15 indicates it is better to buy the property. It can be a slightly better option to rent the property if the ratio is between 15-20. If the ratio is above 20, then the property should be rented.
In July of 2013, average price-to-rent ratio of Istanbul has exceeded 17 reaching the highest level at least since 2007. The average sale price was 939.30 dollars per square meters compared to the rent 4.60 dollars per square meters. The lowest level was 14,79 which was at May 2009 when the home prices tanked over 45 percent from 2007 highs, according to Reidin.
Altan Elmas, chairman of Dap Construction, believes the change in price trends was a result of too much property supply in recent years. “Even though the supply of homes increased, some people cannot still afford a home. But the ones who do buy homes for investment purposes and rents them. As a result there is many homes available for rent which pressures down the rent prices. There aren’t as many homes for sale”, said Elmas.
The price-to-rent multiple can increase if the home price goes higher or the rent price goes down. In both cases, it becomes more profitable to rent the property.
Before the housing bubble burst in USA and Dubai, the price-to-rent ratio climbed to elevated levels. According to the Bureau of Labor Statistics the ratio was around 27 in 2006 which then had a sharp drop as the home prices collapsed.
According to Reidin, in USA the home prices are still very depressed when calculated using rent. The price-to-rent ratio is still 25 percent below what it was in 2007. However the Dubai property market began to recover where price-to-rent ratio has increased by 20 percent.
According to Assoc. Prof. Ali Hepsen of Istanbul University, the increase in home prices compared to rent was more reasonable compared to other countries. “The price-to-rent ratio is 10 percent higher compared to 2007 in Istanbul. The home prices increased but the rents also did” said Hepsen and added:
“Home prices are still cheap in USA. Prices are not even close to pre-crisis levels but only slightly higher compared to the dip levels. US was hammered pretty bad.”