Many analysts use the Price to Income ratio or the Price to rent ratio to analyze the housing market. They assume that all parameters except price and income (or rent) are constant. Households need to save and borrow to buy a house and consequently, interest rates play an important role for them. Although real interest rates may have a long-term trend, they have fluctuations, so we need indicators that show these changes.

The 30-year Real Loan Payment ratio not only takes into account the evolution of housing prices and income but also of real interest rates. In a future post, I will explain why

The Price to Income ratio is almost at the same level today than it was in 1981, but today

Is the Price to Income ratio a good indicator?

The 30-year Real Loan Payment ratio not only takes into account the evolution of housing prices and income but also of real interest rates. In a future post, I will explain why

**real**interest rates are better than**nominal**interest rates to assess assets like housing. I show a graph with two housing market indicators: the Price to Income ratio (green line) and the Real Loan Payment ratio (red line).The Price to Income ratio is almost at the same level today than it was in 1981, but today

**nominal**interest rates are at 4% and they were at 15% in 1981. Mortgage**real**interest rates are around 2% in 2011 and were above 7% in the early 1980's. Today prices are more affordable than they were in 1981 (Same price to income - lower interest rates). The Price to Income ratio fails to explain that houses are today more affordable. In contrast, the 30-year Real Loan Payment indicator clearly shows it.Is the Price to Income ratio a good indicator?