Your stocks plummeted, but the value of your home is way up. Is it a bubble? To learn more, check out local rents.

A real estate agent will tell you the ultimate drivers of property prices are mortgage interest rates, school quality, shopping proximity, neighbourhood prestige and "curb appeal"--that is, the esthetics of the home. Closer to the mark, but fuzzy. Here's a better way: See if you can calculate a price/earnings ratio for your house or condo. Lately your stock portfolio may be down, even though market P/Es aren't. Let's see where your home value sits.

As with stocks, so with real estate: P/E ratios vary enormously, with glamour properties (in Nuns’ Islands or Westmount) going for much higher multiples than undesirable ones (in Lasalle). And, as with stocks, real estate multiples can get out of line. There are times and places when they are unrealistically low      ( 1992), and times and places when they reach bubble proportions (2002). So what are the "earnings" on real estate? Start, just as a commercial real estate investor would, with the rental value. From that, subtract operating costs--insurance, property tax and maintenance. Now you have a net rental value. Divide this earnings figure into the price; you get the property's P/E.

To get rental data for homes comparable to the one you're buying or selling, check with the relocation department of big real estate agencies, the ones that need to track down living space for executives on temporary transfers.

In the short run, prices can go anywhere, but in the long run they are
inevitably driven by rental values. "The market only cares about how the property's income is growing--or shrinking".

If you have paid $271,000So for a condominium -- did you overpay? Using rents in the same building as a basis for comparison,  say for example the apartment's rental value is $27,600 a year, or $19,320 net of operating expenses. You paid 7 times earnings, fairly typical for Nuns’ Islands these days.

Talk P/Es to a real estate pro and you may get a funny look. The usual practice
is to invert this ratio to find what's called a capitalization rate. Nuns’ Islands P/E of 7 corresponds to a capitalization rate of 1.5%. You can invert a stock's P/E in the same fashion, to get an earnings yield. Microsoft has a P/E of 46, meaning that its earnings yield is 2.2%. If Microsoft were a building, you'd say that its capitalization rate is 2.2%.
 
Think the capitalization rate as your return on investment (ROI). Compare it to
ten-year Treasury yields. One to two percentage points over ten-year Treasury yields will certainly give you a certain confidence that you have not overpaid your property.