Is Boston in a real estate bubble right now?
Interest rates have been at historic lows for an historic amount of time. Arguably they are being kept artificially low by administrations that want to showcase rising stock markets headed into their next election. In the US, President Donald Trump called for negative rates to match the European Central Bank’s. Any increase in rates from new administrations will lower real estate prices, and perhaps shock economies used to cheap money. Until then, borrowing is easy and prices remain artificially high.
That prices have outstripped underlying rental income is no surprise to value investors, especially at the small end of the spectrum. The most recent CoreLogic data summary of the U.S Census Bureau’s American Communities Survey shows gross rental yields for Boston below 7 percent at 2017 prices.
At current higher prices, after debt service, taxes, insurance, maintenance, management and vacancy, borrowing at commercial rates is unprofitable in the aggregate. For example, a Cambridge two–unit property recently listed at $1.99 million, underwater on the basis of typical debt service alone. Dorchester and Hyde Park appear to offer relative deals, but here deferred maintenance and management will be significant.
As far out as Worcester, multifamily properties are now appraising above what cashflow will support. The only buyers left at top market prices are tear-down developers and cash buyers looking for a place to park capital, but not run a business.