The definition of a price to rent ratio is a mathematical calculation used in the Trulia Rent Vs. Buy Index that compares the totals costs of homeownership with the total cost of renting a similar property. The total costs of homeownership considered by the ratio include:
- Mortgage principal and interest
- Property taxes
- Insurance
- Closing costs
- HOA dues where appropriate
- Mortgage insurance where appropriate
Logically, a ratio > 1 means its more expensive to buy, <1 is more expensive to rent...and 1 means either option is the same financial impact.
Tax advantages for owning (such as the mortgage interest deduction) and the total costs of renting, including the actual rent and renter’s insurance, are also considered in the total cost of renting.
See my blog post What’s the fate of Mortgage Interest as an Itemized Deduction? for more developments on mortgage interest as tax deduction.
http://www.fool.com/investing/general/2012/03/27/housing-time-to-buy.aspx
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