Apartment sector at risk of a bubble

A bubble may be forming in the apartment sector.

Some loan practices may be hurting the apartment market in the long-run, as it may be creating a bubble, according to a report from Chandan Economics.

Current loans being given to commercial real estate companies, are inflating the value of apartment buildings, and those who purchase property may not be in a position to refinance their loan later on when rates rise, the report said. With homeownership at such low levels, many investors are attempting to grab apartments, as there is such a high demand for rentals, and prices are affordable.

In addition, rents have increased substantially since late 2010, and fewer apartments are being constructed, the report noted.

"With so much attention focused on improving apartment fundamentals as a rationale for competitive bidding, market participants are at risk of underestimating the critical role of low-cost financing fueling current apartment trends," Chandan Economics said.

There are some positives to the apartment market, despite its risks. The National Association of Realtors noted in a recent report that multifamily rental market vacancies are projected to fall 0.2 percentage points by the end of 2012.

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