I'm amused, however, at the notions being expressed now that market values of residential properties should somehow be measured in terms of rental value or that the income approach to appraisal be applied to personal residences.
. . . . In Northern Virginia, tenants are scarce for many large office buildings. On the other hand, affordable houses are in short supply. Why the value of the latter should be measured on the same terms as the former, is beyond me.
First of all, I'm obviously not talking about "office" buildings when I say investment properties affect real estate prices.
And I still think you miss the general point. I'm not saying that investment real estate determines residential home prices in a lockstep fashion, but that housing prices still follow the general laws of supply and demand. Housing supply, while relatively inelastic, still does have some movement, and as rental properties are converted to resale or developers build for buyers rather than renters, the gap between rental and buying is going to close. As I pointed out, developers are already making drastic decisions to sell whole buildings of former rental units. That surely is having an effect on prices; maybe today its simply keeping prices from appreciating at a faster pace, but tomorrow it may actually bring prices down.
On the demand side, the story is much the same: Income properties and residential properties are relatively fungible to consumers, and as the economic proposition continues to be more favorable to renters, real estate prices are going to be suppressed as consumers go more toward renting vs. owning. This effect may be masked somewhat right now because interest rates are still low, but when rates increase, the cost benefit advantage of renting is going to be glaringly obvious. You are ignoring reality if you don't see that investment return on income producing properties affects the price of residential housing prices.
By this measure, I believe that prices in DC are overvalued right now, and there will be a correction. Of course, a correction can come in several ways, prices can plummet or prices can stagnate for several years. Conversely, rents can catch up as the rental supply is squeezed. Or it can be a combination of any number of them. I'm not selling my properties, so I guess I'm not worried about 30-40% overvaluation. There are some fundamentals supporting prices in DC--scarcity of buildable land, net job, population and income growth in DC, and fairly low interest rates. But I do think that the risk-reward proposition from holding real estate in DC is the worst I've seen in a dozen years, so I would not be surprised to see prices fall 5-10% or stay the same for several years, especially if interest rates spike. |
