There’s no doubt Bay Area average rents are up. And while we wouldn’t be surprised to see another 10-15% increase in 2008 (at least for San Francisco proper), keep in mind that the current housing Price-to-Earnings ratio is still well above its long-term average for the San Francisco MSA.
An analysis by Credit Suisse pegged the historical housing P/E ratio for the San Francisco MSA at 24x Earnings (or annual rent) versus a top 52 market average of 16.6x. So yes, we have long paid a premium (compared to most other areas) to buy versus rent in the Bay Area (or as many often comment, “it has always been expensive to buy here”).
That being said, the same Credit Suisse analysis pegged the housing P/E ratio for the San Francisco MSA at 42x in 2006. Assuming no change in property values and a 9.4% increase in rents during 2007, the current P/E ratio would be 38.4x. And a return to the historical 24x would either require rents to rise another 60%, property values to fall 37.5%, or a combination of the two.