Rental Buildings Not Overvalued
Despite the dramatic increase in the price of Southern California apartments last year, those buildings are not overvalued, nor is the rapid appreciation indicative of a “price bubble,” according to a UCLA multifamily-housing forecast released Wednesday.
The per-unit prices for apartments in Los Angeles, Orange and San Diego counties rose by more than 15% in 2001, provoking worry among some real estate analysts that a “bubble” was on the horizon. But Stephen Cauley, associate director of Ziman Center for Real Estate at UCLA’s Anderson School and author of the forecast, dispelled that fear.
“Are prices too high? Maybe in some areas,” Cauley said. “But in the short run, we are not in for trouble.”
Cauley’s upbeat assessment of the multifamily housing market is based on the expectation that mortgage interest will remain stable and inflation in check. Additionally, occupancy rates are expected to remain the same next year, and rents should grow at a slow rate.
The region is expected to see an increased demand for multifamily housing as the number of young, educated professionals and lower-income families unable to afford homeownership grows. That will likely fuel an increase in rent prices again next year.
While the demand for apartment housing is expected to be addressed for wealthier young professionals, lower-to moderate-income renters still will face a shortfall in the coming year and longer as new construction of apartment units is expected to go up in higher-priced neighborhoods but remain far behind in the areas of the region that most need it.
Northern and northwestern San Diego County, in particular, will see growth in apartment rents, Cauley said, as high-tech and defense-industry employment there continues to grow, fueling a demand for the limited number of apartment units available.
A number of factors could limit the growth of apartment construction. Spiraling rents could affect immigration into Southern California and emigration out of the region, and further erosion in the stock market could hurt growth. A major oil price or terrorism shock also could affect the investment market, Cauley said.
The biggest threat to the apartment market and the housing market overall, however, is the potential for a price bubble. That happens when housing price increases spur expectations of price increases, which in turn push property values up higher than most buyers can afford. At that point, buyers dump out of the market and prices plunge.
Most economists do not see that happening in the near future, however, while interest rates remain low and the demand for housing outstrips the supply.
