Key Investment Tools: Price to Income Ratio

14th October, 2015
  • 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 attainability.

    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 businesses.

    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 property.


    by: Prime Asset Investments

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