Real Estate Bubble

A real estate bubble is a period when property prices rise well above what incomes and rents support, driven by speculation or easy credit, and then fall. Economists often watch the price-to-rent ratio to spot one. That ratio is essentially a gross rent multiplier applied to a whole housing market.

When prices climb much faster than rents, market GRMs stretch far above their long-run range. Buyers accept lower rent yields because they expect appreciation to make up the difference. If appreciation stalls, the multiple usually has to fall, through lower prices, higher rents, or both.

For an individual investor, comparing today's GRMs with the local range over the past decade gives some perspective. A multiple far above that range means the purchase depends more on continued appreciation than on rent. That does not prove a bubble, but it does mean more of the return depends on the market staying strong.

Further reading: Real Estate Bubble on Wikipedia.