Another Real Estate Bubble
This graph came from the 8 August 2007 Wall Street Journal
The capitalization rate shows the ratio of the first year’s rent to the purchase price. This figure should be much higher than the Treasury rate because the rent is not pure profit — it has to cover expenses, such as upkeep and taxes. In contrast, Treasuries have no upkeep.
Paying so much for property only makes sense if the owner can count on higher rents or higher property price — more likely the latter. Basing one’s investments on such an expectation is what fuels a bubble.