Doug Quattrochi

Is the price of Greater Boston real estate unfairly highAre we about to see a correction? These questions ought to weigh heavily on investors minds, particularly now as arguments (at least among landlords) seem to intensify. 

In the yes camp we have three main talking pointslow interest rateslow rental yields, and high expected reinvestment. Meanwhile the “noes” talk about high demand and low supply which shows no sign of changing. 

Yes, We’re in a Bubble 

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 aggregateFor example, a Cambridge twounit property recently listed at $1.99 millionunderwater 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 supportThe 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. 

Even if these properties did enjoy good cashflow, there ought to be concerns over expected reinvestment, particularly as forced by climate change and climate policy.  

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.

Flooding, for instance, now affects South Boston at least twice yearly under “king tides”, and more frequently in storms. Flood insurance, resulting loss of appraised value, and water mitigation retrofits may require owners to re-up 

Natural gasto give another example, may need to be retrofitted out of buildings before longBerkeley, California banned natural gas in new constructionHolyoke and the Cape have moratoriums on new hookups, even for existing housing unitsElectric heat pump and induction stove retrofits may require owners to provide additional capital before the end of their gas fixture service life 

For this and other reasons, prices do not currently reflect the long-term cost of owning poorlysited or poorlyequipped properties. 

No, We’re not in a Bubble 

While all the above is true, demand for housing remains strong as locals are displaced by an influx of highly compensated professionals, especially in healthcare, academia, and tech.  

The Kendall Square median household income in 2018 was $75,314. That is average for Massachusetts, but consider the spread: Average compensation for Google engineer, for instance, is $150,000, and households with two or more professional earners easily make multiples of median. Across the river in Suffolk County, the top 1 percent are making over $2 million a year.  

Such households know the power of leveraged price appreciation, intend to climb the property ladder, and will continue to purchase real estate on the basis of what they can afford, rather than what would cashflow for an investor. Employees of stable and remunerative employers will continue to drive demand for Greater Boston real estate for the foreseeable future. 

Supply, meanwhile, has failed to keep up. The Greater Boston Housing Report Card, now in its 16th year, continues to show weekly new construction shortfalls of 150 units.  

Despite the heroic efforts of Boston proper, Metro Boston continues to rank bottom third of new housing permit rates among the top 25 US metro areasBy 2025, we will be 75,000 units behind in a market already seeing low vacancy rates. In many suburban communities, the Chapter 40B zoning bypass is now the primary way new rental units are created 

There is no sign of the political will to make substantive, collaborative zoning reforms. Indeed, Gov. Charlie Baker’s housing choice bill would drive us away from consensus by lowering the requirement for many zoning changes from two-thirds to simple majority. Without difficult conversation leading to sweeping and widely agreed-upon zoning reform, housing supply will remain constrained for the indefinite future.  

Doug Quattrochi is executive director of MassLandlords, Inc. 

Is Greater Boston in a Real Estate Bubble?

by Doug Quattrochi time to read: 3 min