As it pertains to real estate, the price to income ratio is a basic
tool for measuring how affordable the housing is in a given area. A
price to income ratio is typically represented either as years of income
or as a percentage. When the ratio of an area is applied to an
individual, it becomes an important part of the process of making a
decision on whether a bank will lend someone a mortgage.
The process can differ a bit when applied to first-time home buyers.
Bankers and real estate experts often refer to this scenario as
How to find the Price to Income Ratio
The first step in finding a price to income ratio is to determine
what the median household income is for a given area. The median
household income is equal to the gross income from any and all sources,
and these sources may include investments, salaries and any income from
Once a median household income has been determined for the area, one
must determine the median house price in the same area. The housing
value is determined for an individual home by estimating how much a
house could be sold for if placed on the market for a reasonable amount
of time by a seller who is not incentivised to take a lower price.
The median house will be the house that has exactly 50% of the
houses in the area priced below it and 50% of the houses in the area
priced above it.
By comparing these two numbers, a price to income ratio can be
developed. Once you have a price to income ratio, it can be used to
determine whether homes in the area are undervalued or overvalued. This
information is useful for an investor to have before purchasing a