Even when the prices are almost identical, not all affordable neighborhoods are equal.
From our recent market report, the three most affordable neighborhoods in Boston were Mattapan ($264/sq.ft.), Hyde Park ($279), and Roslindale ($335/sq.ft.). And just north of Boston, Chelsea ($252), Malden ($268), and Everett, ($274), are among the most affordable cities in the Greater Boston area.
The asking prices for most of these neighborhoods is fairly similar, between $252 and $279 per square foot. But comparing these prices to the annual rent, provided insights on which neighborhoods might be further along in their gentrification.
But first, a bit of background. Housing prices convey a significant amount of information about a neighborhood. Purchase prices can be seen as a measure of the longer-term prospects of a neighborhood; in other words, will housing prices increase over time? As the economists put it, current prices are a way to value the expected future upside. On the other hand, asking rents can be seen as a reflection of what the neighborhood is like right now – if major improvements are expected to happen in a few years, this does not affect the life of a tenant who has a one-year lease.
The takeaway? If a neighborhood is improving, purchase prices may be increasing faster than rents, as owner-occupants
With this in mind, we analyzed both the asking annual rents and the asking prices, and then compared them:
The housing prices in both Chelsea and Malden are 10.8 times the annual rent. In Everett, not only are rents slightly higher, but housing price are also a bit higher relative to rents, at 11.72x the annual rent.
Meanwhile, for the neighborhoods within Boston, the housing prices were a higher multiple of the annual rents. And as neighborhoods become more desirable, purchase prices become a higher multiple of the annual rent. Or to put it another way, when neighborhoods offer good rental yields, investors will buy them for this purpose. As they become more desirable for owner-occupants, they offer lower rental yields.
For example, the asking price in Hyde Park is 12.56 times the annual rent and Roslindale is 13.43x. This suggests that someone is willing to pay more to live in these neighborhoods as an owner-occupant than in Chelsea or Malden. For context, the prices in Lower Mills – arguably one of the more desirable neighborhoods within Dorchester – are 19.22x the annual rent. In even more established neighborhoods like Back Bay and South End, the asking prices can be well over 20x the annual rent.
There is one anomaly, however. The housing prices in Boston's Mattapan neighborhood – the most affordable neighborhood in Boston – are 16.92 times the annual rent. This seems like a bit of an outlier. While the other regions we studied had annual rents ranging from $22-26 per square foot, the asking rent in Mattapan is only $15.60/sq.ft.,for the listings analyzed in this study.
Not only is Mattapan the most affordable neighborhood of Boston in which to buy, but the rents are also disproportionately low.
Another way to look at these numbers is to study what $1M of investment would generate in gross rents (excluding taxes, broker fees, and related expenses):
A comparatively desirable neighborhood like Lower Mills would only generate gross rent of $52,000 per year, whereas Roslindale would generate almost $74,000 for the same investment.
Constantine A. Valhouli is the Director of Research for NeighborhoodX. His research has been presented at the Stanford/MIT Venture Forum, and is on the graduate curriculum at Stanford and Tsinghua University (Beijing). Harvard i-Lab. He holds an MBA from Columbia Business School.
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