The Relative Real Estate Bubble?

I saw the former member of the Bank of England’s Monetary Policy Committee, Willem Buiter, being quoted on the Observer on Sunday on sources of imbalances in the UK economy.

Real estate has moved from boom to bubble. Debt levels in the public sector and the household sector are far too high…

I’m not so sure why he picks on real estate. It’s hard to see any evidence at all of a bubble in the commercial real estate rental market. In terms of the investment market, if commercial real estate is in bubble territory, it seems to be because other asset classes are also even more exuberant.  With 10 year government bond rates at c1.7% and the FTSE 250 currently producing a dividend yield of c2.5%, a net income yield from prime real estate of 4%-5% must seem pretty attractive to investors with cash. In the listed real estate sector, the key bellwether of Land Securities is pretty close to the market average with a dividend yield of around 2.5% and British Land looks cheap at nearly 4%.  In relative terms, real estate looks reasonably priced.  The key word here is relative.  Prices in private commercial real estate markets could still fall if the prices of shares and/or bonds fall dramatically.  I suspect bond markets will be the key.  Commercial real estate prices remained fairly stable after the dramatic stock market bust of 1999-2000.


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