There is a finite limit to the amount of rent most landlords can charge.  Whatever the number, $2500 per month or $7,000 per month the value of housing is intimately tied to the income stream it can provide, just like a stock, except the math is a little more straightforward.  For example a house that rents for $7000 per month, can reasonably be expected to provide no more than $70,000 per year in income (that’s 10x$7000 per month, the other two months account for taxes, maintenance, and repairs). That’s assuming you have the time and inclination to manage the property yourself. If you are going to pay someone else to do this, then plan on receiving 10-40% less per year

What’s an income stream like $70,000 worth today in an ultra low interest rate environment.  If you use 3% as your expected return on investments, then $2,333,333 would be a price you could expect to pay. But how practical is that?  If you miss just one month’s rent a year every two years, that would discount the price by a more realistic 5% to  $2,216,666.

You’ll also be able to raise rents most likely something along the lines of rent CPI inflation so in that respect there is some hedge to inflation although it’s reduced somewhat because taxes go up and repairs go up at more or less the same rate.

3% is a pretty low targeted rate of return though for many investors especially on something as illiquid and difficult to manage as real estate.  What if your return expectations are more like 7-8% per year.  Mind you the average pension plan in the United States is based on 8% per year returns.  In that case the $70,000 per year income stream is now worth only $875,000 ($70,000 / .08).

So my answer to people that think stocks are undervalued due to extraordinarily low interest rates. Do you not think these low interest rates have inflated the value of real estate too?  What would you rather have?  A liquid,maintenance free, hassle free basket of stocks paying 3% a year that have raised their dividends every year for 50 years or a piece of income producing real estate?  In either case both will be impacted by a reversal of rates but at least with the stocks, you’ll be able to sell them in a timely manner if you so choose.