The Alternative Real Estate Bubble

Rents are sliding fast. Landlord concessions are growing rapidly. What is going on?

To compensate for the low housing supply, developers have opted to build rental buildings and condos, rather than single family homes.

Past experience has taught developers that overbuilding during a housing boom can lead to disastrous results. So, instead, they determined that a safer route would be to build rentals, and condos that allow rentals- since even if housing crashes, people will need to rent. Plus, condos are more of an investor-game than single family houses, since they are often in urban areas with younger demographics- and developers can build many at once so that they require a smaller profit margin per unit.

As the result, while there is a shortage of single family homes for buyers, there are too many rental apartments.

Condominiums are not being absorbed by buyers as an alternative to a house. They have been bought by investors to rent out, and by apartment dwellers so that they can own instead of rent.

The net result is an oversupply of rentals.

So- now we enter into the  “bubble” phase.

How many of these condominiums are owned by investors? And how many units will go under water once the economy softens. With the oversupply of rentals- many may go belly-up even without any economic decline- though rental buildings may do worse than new condominiums buildings, which may be stealing tenants from older rentals.

Janet Yellen noted on CBC after she stepped down as Chairwoman, there may be a “commercial” real estate bubble where incomes and prices are not aligned. This problem may be to what she was referring- too many rental units (she surely was not referring to  a bubble in retail space- that is not a “bubble” as we mean when we talk about “bubbles”. There is simply an oversupply of retail square footage developed over decades which has become obsolete in the “new economy”.

So, how are single family houses implicated, if at all? Well- if renting is more and more affordable than buying- house prices will decline. Also, single family homes have, like condos, attracted a lot of investors as buyers over the past few years. These factors are separate from, and in addition to, the disparity between housing prices and incomes.

In an economic decline or recession, see could see a bubble-burst in condo apartments or or rental buildings cap rates, along with prices in single family houses.



Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

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