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What’s Your Home Worth?
This is a vexing question for millions of Americans. There
was a time when most people had a reasonably good idea of what they could sell
a property for. There were enough
purchases and sales to create comps. Not any longer. Homes that have been
foreclosed on come to the market at distressed prices. This is happening in
every neighborhood across the country. When one property sells at a distressed
price it influences all the properties around it.
So what is residential real estate worth today? The answer
to that question is, “About 15 times the annual rent”.
RE professionals are going to write me and say that this
simple calculation is wrong. They will say that the number is lower. Possibly
as low as 12 times rent. They might be right. However in areas of the country
that I watch the 15 times rent number is a pretty good indication of value.
Based on this calculation the following rent/price
guidelines can be determined:
|
HOME PRICE |
MONTHLY RENTAL |
|
$200,000 |
$1,100 |
|
$350,000 |
$1,950 |
|
$500,000 |
$2,800 |
|
$750,000 |
$4,200 |
|
$1,000,000 |
$5,600 |
|
$2,000,000 |
$11,000 |
It is still difficult for a homeowner to make a reasonable
estimate on what the rental value of a property will be. But I have found that
most people have a better handle on this number than they do on what their home
can be successfully marketed for.
There are regional considerations for rental values, by and large this
formula works well for metro versus rural properties as a valuation tool.
This analysis creates a tremendous problem. There are very
few homes for sale at 15 times rent. The only ones that come up for sale in
that price range are those that are in foreclosure and are being sold by bank
lenders. We know that there is demand for properties when those conditions are
met. That has been proven in just about every area of the country.
In my view the bulk of unsold homes on the market today are
trying to get sold at a multiple of rent that is at least 20 times. That is why
these homes are not selling. The implication is that on balance RE is still 25%
overvalued. The bad news is that rental values are dropping across the country
as homeowners are forced to rent properties that can’t be sold.
I would be interested to get comments on this. I would like
to hear from people around the country if they thought this pricing mechanism
was in the ballpark for their area. I would be particularly interested to get
comments from folks who live outside the US to get a look on how that stacks up
as well.
If my sense of this is correct we are in for a very rude
awakening. Those with $1MM+ homes will be particularly depressed by this
calculation. My sense is that high end RE is in the process of a massive
correction. The sheet rock palaces that were built with cheap money from 2002 to
2006 are worth half of what was paid for them. We just haven’t figured that out
yet. The impact on consumption will be very significant when that reality sets
in.
A back of the envelope analysis of the rental values of
American homes produces a capitalized value of $9 trillion at 15 times rent.
The mortgages on these same homes is equal to $12 trillion. We are missing $3
trillion in value based on this. That might be a decent estimate on how much
the RE mess going to cost us.
»
I think you're spot on. Funny, but these were simple, rule-of-thumb valuation parameters for Realtors less than ten years ago.
Thanks for all of these comments. A non scientific but still interesting summary:
-The 15X number is in the ball park across the country.
-California reports 25X is their reality. This implies their RE is still over priced.
-Miami and Vegas sound cheap by this analysis.
-DC looks good Metro NY not so good. Possibly the impact of big government?
-Outside of USA RE is much more expensive. 25X to 35X is normal. This means that the USA looks cheap. Does purchasing power parity have anything to do with currency rates? Nah..
From another site I got this. I think it is real. It is a mind blower!!
15 times! Here in Shanghai one would be lucky to get 25 times.
I have a few properties that I rented out for about 35 times, and that was up about 20% (from already high 28 - 30 times) since beginning of this year after the massive credit expansion.
I kept telling my since early this year, at RMB 60,000 per m2 ( US$ 8700 per m2) or RMB 5500 per ft2 (US$ 800 per ft2), the luxury condo in Shanghai is more expansive than most places in US. But prices kept defying my prediction of looms.
Even the average apartment downtown at 1/3 the price (about RMB 2.5 million for a 2 bed rooms 1100 ft2) works out to more than 10 times white collar family annual income.
Who knows, USA might become competitive again in a few more years.
We are free and clear on our home. We see two options.
One to sell out, take the proceeds and retire all debts and free ourselves from of all debt. The second option is to rent at 900 dollars a month to a tenant and still be free and clear of all debt plus make cash flow AND keep the equity in the paid off house.
The trick is to get into another property at about 10x rent and right now there is a flood of them here in Arkansas that are lower than that in asking pricing.
We have seen a bit of tough times as several homes in our area were empty for a time. However now I see people buying, renting and improving thier homes.
Makes me want to start looking for a house to buy. We could be at the point where prices will not fall too much further. We are trying to wait out the storm while watching the foreclosures and auctions roll on until all the deadwood are cleared out. Then we buy just before everything takes off eh?
That to me is a big if. Can we get it done before interest rates go back above 5% for a 15 year? Or better yet, sell and buy the second home free and clear or nearly so.
There's a premium on owning over renting in some places - by no means everywhere. In those desirable residential spots it is more realistic to look at 20-25x rent as the value multiple.
There is an interesting dynamic going on with the rental RE market that no one is picking up on. It's happening here in the Panhandle of Florida and probably all over the Nation if you take a close look. Plenty of empty houses, very few for rent. It's one of two things, fear or greed.
I'm sure some of it is homeowners holding out to sell and not take a loss, the greed factor. Most of it is fear, they are scared to rent their empty homes because they quit making payments. They don't want renters to be forced out by a foreclosure that eventually will happen. Smart owners can spend $1000 on legal fees delaying the foreclosure process for years here in Fla, rent their home with a cost basis of next to nothing, but most don't know or don't bother. This actually decreases the supply of rental units on the market which in turn raises rents due to lack of supply. The banks aren't pushing the foreclosures, the owners are scared, the available supply dries up or at least doesn't increase like you think it would. Until the banks come clean on the balance sheet or non-paying owners see the business opportunity, this really strange dynamic will continue.
If anyone wants to see what could happen to their real estate values, just look at south east Michigan.
Here is the good news:
- The average home price in the city of Detroit recently hit $5k!
- In the outlying, 'expensive' suburbs the factor seems to be about 15x. My home is now at 15x.
- Home prices were “reasonable” a decade ago, they rose about 40% to 50% until 2006/7 when home prices fell off a cliff.
Here is the bad news:
- Home prices have NOT found a bottom. They continue to drop.
- Starter homes were the first to be hit. This market has been shut down for 2+ years and continues to be dead or as some say, a very slow pulse.
- The other shoe to drop (and this is a very large shoe) is the large number of mid to high end homes whose owners are now unemployed or (most importantly) under employed. Real unemployment rates are +20% in south east Michigan.
In the past, a mid to high level wage earner who lost their job would find another job with similar income levels. Net net, no substantial change to their lifestyle.
Today, with so many jobs gone (and not coming back any time soon) many of these mid to high income people will need to substantially reduce their lifestyle or move out of the area. At present, their savings are or almost depleted and many people are defaulting on their homes.
Either way, home prices will continue to decline for several years to come. There is no quick fix to this problem.
I wonder if Detroit will be the 'black hole' sucking the rest of the country in with it as it continues to implode? Detroit = Large Hadron Collider ?? :-)
I live in central Indiana and your estimate of 12-15 times rent is spot on here. In my town 4br, 2ba 2400 sq ft homes in good condition rent for $650-$700/month, at 13 times rent that is right around $100k. Last month I sold a previous rental property for $99k, so that validates the valuation theory here in Indiana, at least.
On aggregate there is obviously a ratio, whether or not it is 15x I do not know but it's playing a bit fast and loose to take that ratio, whatever it is, and then broadly apply it. Sort of like telling Granny on her 78th birthday that tomorrow is her last day on earth based on average life expectancy.
I'm not an RE pro but am familiar with RE values and rental values and in my limited experience rent/value ratio is not a straight line correlation. Other variables come into play, for example: Land value vs. house value e.g. a dump on a million dollar lot. Affordability is another variable and in my experience there is a threshold at which point the ratio changes e.g. the higher the value of the property the lower the ratio. The market for $10k/mth homes is far more limited in the same way that the market for 1,200/mth homes is much larger. Granted the supply of the former is perhaps lower but the point is affordability plays a huge factor in rental rates. Vacancy rates are another factor that have a meaningful impact on rental rates as does location e.g. urban vs. suburban. etc.
15 rate may work well unless there complicating local factors, like university, hurricanes, local job loss or gain etc.
Does anyone has an hint on Chicago metro area RE trends? was told that both foreclosure rate and RE prices are growing at the same time
Zurich has super low mortgage rates and government regulated rents, hence the multiple is about 25X. It's great to be a renter, but hard to find an apartment. You essentially have to take whatever you can get.
Anon #67831:
I live in Westchester and have one of those Mcmansions. You can't sell these beasts today. Those that do sell fall into my 15Xs rent calculation. If you do not believe me ask Timmy G. the T Sec. He is trying to sell a house nearby. He could not do it so he rented it to limit his losses. The rent times 15 comes to price that he woud take a bath on.
You'd want to get 8% minimum on commercial RE, yet housing in Australia is returning closer to 4%, that doesn't look like a great investor market. Yet here people are piling into RE, over 27% are first home buyers. Granted they're getting $7k to $14k from the government as a grant, so on an 80% LTV that gives them $70k ($14k x 5) of effective leverage.
No wonder we're seeing lower end prices shoot up (as the sellers are getting an extra $40-70k) and that's rocket launching prices in properties in the $500k-$800k bracket by $200-$300k on the 5x leverage. And its all thanks to the government manipulating the housing market. That an negative gearing on investment properties, small wonder the housing market here is trading at 25-30 times rent.
You've all seen the Case Shiller index fly like an eagle and sink like a stone. The aussie chart is no different, except the aussie icarus hasn't got close enough to the sun, yet.
Will be interesting to see what happens when the government's $14k First Home Buyers Grant gets axed at the end of the year, interest rates go up to fund the deficit, those green shoots turn out to be a banker's wet dream, China's bubbles pop and unemployment here spikes seriously upwards as the China-driven commodities boom dries up. Long term population growth means more housing is needed, no doubt, but who'll be able to afford it when average prices are at already 6-7 times average income? Long term average is 3-3.5. Small wonder properties here are 25-30x monthly rent, but for how much longer?
15-20 seems about right, either that or my landlord is about to hike the rent to do better than 4%.
well, here in silicon valley, we rent for a 24 multiple (based on recent comparablesale on the same block). Two years ago, it must have been closer to 30. Min prices are about $700K and our rent is about average for the area.
I also live in Silicon Valley, and the rent multiples are indeed absurd. It's a wonder why anyone even buys in this area, when renting is less than half the price of a comparable mortgage.
The thing is, the rent multiple must come down, and rents are currently coming down too as dot-com bubble version 2.0 winds down (Twitter = $1 billion sounds like 1999 all over again).
In 2010-2012, housing prices here are likely to fall faster than anyone can imagine.
Nat Gas to crude was historically super cheap at 15 to 1,
Then it went to 37 to 1.
Timing is EVERYTHING.
Please tell me if I'm wrong, but I thought the actual traditional formula was that, to be safe, you can plan 1/3 of your paycheck to go for mortgage, taxes, and insurance. So if your salary is $50,000 per year, and you bring home after taxes maybe $36,000, which is $3,000 per month, you can pay $1,000 per month for mortgage, taxes, and insurance.
Very very simple.
That leaves you $2,000 a month to pay for everything else. Food, clothing, electricity, phone, schooling, medical care, savings, car, car maintenance, car fuel, and car insurance. And a little entertainment perhaps.
So how expensive a house can you buy for $1,000 per month mortgage, taxes, and insurance? $200,000? I don't think so. How about $100,000. Or will you be taking out a 30 year mortgage, or a balloon mortgage? Or will you just go buy the $200,000 house anyway, because of the school district it's in and the shopping it's close to for wifey? Either way, if anything happens, say you go jobless for a few months, or someone in your family has extraordinary health or other costs, will that endanger your ability to pay the mortgage, taxes, and insurance on the $200,000 house?
I don't know (or, personally, care) how that fits in with the renter stuff. But... why buy a house to rent it? Being a landlord is work. Nevertheless, if you want to be a landlord, and the jobs in your area support $50,000 salaries, does that mean that a renter can pay you $1,000 per month rent? Well, if that is what he can pay, then will that provide you enough income to pay the mortgage, taxes, and insurance, and also the maintenance? Because, if it doesn't, then it seems to me that you are still speculating on real estate, and isn't that exactly what caused this bubble and crash?
meanwhile, here's an amazing "reality" check from the MSM:
******************
With historic low prices, in years to come many Americans will look back on 2009 as the year they should have bought a new house
Buying a house in the U.S. hasn't been this affordable in a generation. Not only have housing prices plunged from Miami to Los Angeles, but interest rates are near historic lows. And for first-time buyers who act fast, Uncle Sam will kick in $8,000 toward the purchase.
Interestingly, the most affordable and least affordable housing markets haven't changed much since the housing market was booming a few years ago. Last year, the most affordable housing markets were dominated by cities in Indiana, Ohio, and Michigan, and the same is true this year as well. Midwestern home buyers get the best bang for their buck. And most homes sold in pricey East and West Coast metros remain unaffordable for average earners.
Dennis Torres, Executive Director of Real Estate Operations at Pepperdine University, said the housing crash and low interest rates have combined to create a once-in-a-generation opportunity for buyers. "People are going to talk about this as 'I could have, I should have' for decades," he said. "If you're confident that you'll stay in the location for seven years and you're confident of your income, don't walk, run."
Housing is at its most affordable level since the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) began tracking affordability in 1991. In the second quarter, 72.3% of new and existing home sold were affordable to families earning the median income (down a tiny fraction from the previous quarter but up from 55% a year earlier).
Businessweek.com
************************
the convoluted math in the last paragraph left me feeling a little mixed up, so it must be kosher. where do i sign?
In Westchester, not far north from Geithner's old haunts we're renting an 1800sf ranch which sits on about .4 acres. Close to town and station, walking distance to the middle-hs grounds. Beautiful backyard which is great for my bearded collie, daughter and whenever we want to hang in the nice weather.
I'd never buy on this street since it's a double-yellow line cut-through and drivers are never holding 30mph despite my frequent glares.
Inside, smallish (coming from a 2700SF open floor plan colonial) for a transitional rental but beyond that tired and frankly, an eventual tear-down when some builder decides to roll the dice on putting up one of those McMansions. Lots of them around us where in the past, little ranches got demolished during our period of phony prosperity.
At $4500 per month...we think it's expensive but last summer, after trading out of our home (at a very nice profit) we needed someplace that would rent without long-term lease, take a dog and wouldn't be too pricey.
Doing the math I can tell you 15X rent = $810K and for the house as is...would be rich in my mind however there is the .4 acres to consider. This alone would justify a much higher ask however the owner knows the builders aren't coming looking. He's in no rush to sell and likes us as reliable and responsible tenants.
We want out because we want to settle down and frankly, we can buy with mostly cash and end up with smaller outlays monthly. Question that I keep asking myself is where will this market be in a year or two etc? Ultimately I have to believe that this wealthy community will not be tanking though it may yet get another nasty surprise. We have to live somewhere and if it's this town, owning at our price point seems more sensible than renting.
Now we just have to find the right home, neighborhood, street and come to terms with sellers who are not easily convinced.
NAHB and Wells Fargo...well, there you go, solid as Chinese drywall.
At the bottom tier of pricing, affordability has returned, for sure. Being the only family in the development might take some getting used to but all kidding aside, this is where the "affordability" story has some legs.
At the upper end, slightly different, inventory is not moving speedily and prime borrowers are falling behind now in increasing numbers. Foreclosures haven't blown holes in these markets (at least by me in Westchester) but there are cracks appearing.
They were telling people in 2007, "never a better time", NAR, Greenspan et al.
Caveat emptor...know your local market, neighborhood, street and never let your reach exceed your grasp.
Simple & right to the point, I like it. The ratio (15) sounds reasonable, 7% gross return x.4 = 2.8 % net CF sounds about right (historic 20y. average; ) for RE. If you ve got to make real money, going for 10 - 12 might be crucial though.
Gotta laugh. This means I have no clue what my house is worth. The figure I come up with using this calculation is way too high!
Bought house in 1993 for $71,500
Currently pay taxes as if it was worth $116,000
Insured for $136,000
2 bedroom/1bath near me rent for $850-900.
I have 3 bedroom/2bath, PLUS a garage apt. with bath out back. If I am conservative, and use your formula...
$1,000 rent x 12 = $12,000
$12,000 x 15 = $180,000????
No way, right?? You would actually think I should be able to get more rent than this, given what houses are going for around me???
This would be great news for me, if true.
With my luck, I would put my debt free house on the market, get that amount, and then the dollar would crash!!
I prefer to use the replacement value comparison analysis or the financing alternative comparison analysis - rent multiples vary too widely.
Zillow is a very good resource for the Northeast corridor, as far as I can tell.
Hey, I live in a dump in Sydney Australia, asking price 36 times rent. Everyone here madly wants to buy....crazy
Bruce,
In terms of upper-end condos, I see condos that have been listed for over 2 years at 30 times rent. I've actually seen people buying at 20 times rent. However, I think the prices will migrate down. Developers have new buildings coming on line, and are selling at lower prices. Layoffs of bankers, brokers, consultants, etc, have further to go, which will bring down demand.
Anyone else live in DC? Rents here are very high. If the rule of 15 is true, then Washington DC is in great shape and home prices should go up.
Have noticed no ZH posts re whether or not there is a default/foreclosue rate difference between states with non-recourse anti-deficiency statutes/one action laws VS.states without them.If there is a significant difference- what that might mean in terms of pent-up/delayed delinquencies/defaults/walk aways/foreclosues due to that sticky personal liability for the deficiency, especially in areas with continuing job losses/loss of tenants in "primary resdidence" investment properties.I'm sure the Fed is watching this closely.
I would imagine RealtyTrac (they are good, part of FAF) has that info, but it's likely a pretty penny to get their reports. Try looking 'em up and see what depth of info they provide on their website. Same goes for Case-Shiller.
Wow...that 15x thing MAY be pretty solid.
I am in the process of walking away right now.
I bought my house for $750K in 2005.
My guess for it's current value lately has been $450K.
Well, $2500 per month sounds about right for rent...and I that is the number I just used on my first run using the 15x...
$2500 x 12 = $30K
$30K x 15 = $450K
...and when I first saw the 15x, it sounded like BS.
Maybe not...
Very good and clear analysis.
I would think though that rent is simply a bridge to get to the more important variable that houing prices are (should be) based on: median income. Rent is afterall just a measure of the costs of residence that is more closely connected to income.
The equilibrium value for house prie/median income I believe is somewhere around 3 and we are above that ratio... and as long as median incomes continue falling and house prices dont keep up, we will forever be chasing this equilibrium.
I think it's pretty funny that people think 15x annual rent is some kind of value floor. Gimme a break.
Upscale neighborhoods which are rarely rented, like McMansions in Westchester county, can often sell for prices that rents don't justify. For the few rentals that exist, the owners are not real estate investors but typically someone in some sort of transition period, and will accept a poor return on capital.
However, if you have a residence which is comparable to investment rentals nearby, such as a 1-bed condo, then they should trade near investment rental prices. 8% cap rates are common, and we could see 12% cap rates before the smoke clears. This translates into more like 8x annual rent.
Which is a lot less than 15x. A LOT less.
I've another one:
The value of a average house in a country cannot be more than 3,5 times the average income in that country.
F.I: Holland:
Average income: € 30.000
Average house should be (x 3,5) = € 105.000
The average house price is now € 255.000, coming from € 270.000, so they still have at least 50% to go.
Another good article. Don't nitpick the details the fundamental premise is what's important. Fundamentally, in the long run, the average price in an area must be supported by the average income. Since incomes are making big changes now it's hard to predict at what the prices the market will stabilize.
Our experience is that one must get many things right to profit with residential rentals but even if everything else is done right it all comes down to getting a good tenant.
i was going to make that point about incomes in a previous
posting but didn't want fight the naysayers...
but there was a movement about 2 years whose supporters were stressing traditional borrowing requirements
of 20% down, 26-33% debt burden of income (the
% doesn't look right but can't remember the
exact figures), etc.
by such standards one outfit created a website
to look up housing prices by zipcode to see
if they tended to be overpriced or not based
upon traditional qualifications standards...
their general opinion in 2007/8 was that most
markets were overpriced....
it's just another tool to understand how the
pricing dynamics are working in areas where you
want to buy....and no one is saying it's one
size fits all (for those of you who can't
deal with generalities)
If the rule of 15 is true, then Washington DC is in great shape and home prices should go up. Rents here are high.
A home is worth exactly what you can sell it for these days.
Anybody can list a house at any price that makes them happy. Bottom line is that your house is worth what the sell price ends up being.
Way way too much supply and very little demand at list price.
It is the same with all luxury assets. I have a habit of tracking sport car prices on Ebay and essentially nothing sells at the asking price, period.
It seems the same way with houses. You can ask whatever you want but the house can only be traded for the amount of dollars you get offered and it ain't going to be a sweetheart deal.
Especially high end homes. A house that cost 6 million in 2007 in Miami might sell for $800K. Unfortunately that is what it is actually worth in today's deflated money.
I own a condop in NYC which I just rented for $2000/month. According to your formula, its value would be $360K. A similar unit just sold in the building for $355K.
I finally gave up renting a second home that I own... because of the hassle that comes with it... people losing their jobs and can't pay the rent... or couples divorcing and moving out prior to end-of-lease... now I just let a financially struggling women and her 2 children live in it free of charge... and I have peace of mind once again. Bruce... your article gives me peace of mind that I am not losing a bundle on this non-business decision I made... since the rent I could get has been decreased by 1/3.
"...now I just let a financially struggling women and her 2 children live in it free of charge... and I have peace of mind once again."
How absolutely wonderful of you. wow. I hope you are rewarded for that some day one hundred times over. (actually, I believe you will be but I don't want my buddy cheeky freakin' on me for gettin' religious on ZH, LOL!)
+1000
+1000
Cheeky does freak on religion like I freak on racism... so best to stay away from those topics... but when you see your other friend, Layne, remind him of my altruistic nature... he had some misguided idea last night on Radio Zero that I come from a different generation and that he is the one "committed to the whole community thing" and I am the one "committed to the whole system thing" ... then he evaporated never to be heard from again last night... so let him know I have a bone to pick with him when I see him :-)
"Cheeky does freak on religion like I freak on racism... so best to stay away from those topics"
I can definitely understand staying away from religion as a topic in a non religious forum. I do think it is always appropriate to condemn racism in any forum (I suspect you feel the same way!).
Jesus, that sucks. I used to think it was all about toilets overflowing etc...
Now it's "Are you gonna pay your rent?"
Awful
We bought our home in 2005 for $91,000.
The house next door, exact model but mirror image sold for 120,000 in 2008. So, unless massive home devaluation occurred recently in Oklahoma City, I have an idea.
Also we owe less than $80,000 at this time. So I could make some money, but want to stay put.
Currently home values in Oklahoma City are holding pretty well. No idea what next year will bring, but probably a devaluation. Not that property taxes will reflect that. :-(
Only one foreclosed home in my neighborhood, don't know what it is selling for, but it is for sale. Same model as our house, new flooring, new carpet, new doors, new roof. So probably a good price.
I like your calculations. Good reasoning.
I live in centralized part of Copenhagen,..we have very govt regulated rental laws, but if I base it on price vs pay without interest, which is what you could fetch if the market was absolutely free,.. I get a 14- 16 range.
Denmark had a big bubble, we´ve come down 25% on average (still going) Teaser loans,and the like made up close to half of all new purchases in 2006-2007.
On an interesting note, that I´am not sure many americans are aware of,..Germany never had a housing bubble!,.I have a friend who began to sell apartments in Berlin in 2006 and 07 to Danish small time investors who pulled eqity from their own (bubbly) homes at the time. That business i gone obviously, but just to show there was a market because they didn´t have a bubble. (oversupply, conservative bank lending,..just my guess, others are better experts,..but just to say)
Hi,
I totally DISAGREE that Germany had no bubble !
OF COURSE did we have our terrific junk-RE bubble.
It was after the re-unification in the 90s, where all those tax-incentives (and RE-sharks) tried (and convinced) every tax-paying idiot to "invest" into some East-German RE. ("the tax-savings + rent will pay for the mortgage" was the typical cold-call pitch)
So Berlin and the East had its price-explosion in the 90s, and their mass-defaults, law-suits etc. too....
In Germany there were never any lax underwriting-stds - and all those loans are recourse !
Still - lots of short-sales - and RE-deflation by bulldozers !! (lots of RE in the East was bulldozed down, to reduce A LOT OF supply)
The problem with Berlin is, that it's a city full of govmnt and welfare-receivers - and got completely deindustrialized.
Acheivable rents clearly reflect this - in most areas.
A completely different scenario is in the West of Germany (or South here). Here - we slowly ARE getting a bubble!
(but we're still climbing - no bursting in sight)
The bubble forms by the boomers, who try to sell their multi-million-Euro empty nests which they built at times, when it was cheap.
Just look at pages like www.planethome.de - here in Munich - you don't even get a condo for 24x annual rent.
(sure - you'll always find a ran-down dog-hut to prove me wrong)
So finally - where will Germany head to ?
My guess is, that the East will keep stable as there's no room for further downs any more.
For the West - things will start their slide down - just after the elections (today !!!) - when the mass layoffs will materialize, taxes get hiked - so that people start defaulting on mortgages...
In areas like Munich - the downturn will be visible when the layoffs start +12 months - as 12+ months is the average UE-benefit-duration... - sometimes around 2011.
W
15x annual rent is probably about right.
but it's still high by historical standards.
in the 90's the math for buying an income property was that the rent should cover the mortgage, taxes, insurance, hopefully most maintainence, and ideally 10% on top of that.
back then such a situation was the norm. if you went by that rule, you owned the equity within 10-30 years and caught the appreciation to boot.
these days, rents don't begin to cover a normal mortgage note + taxes + insurance + fees + depreciation.
until it does, real estate is a no-go.
Funny how people who want to rent out their homes because they are unable to sell them these days feel entitled to this "90s math" you speak of.
News flash: Your monthly nut is not your renter's concern! Their role is to pay a market rent for fair use of the property. End of story.