I agree it is not a good investment based on the cap rate, unless the rent will be rising quickly to much higher levels. But as Keynes has pointed out long ago,

I agree it is not a good investment based on the cap rate, unless the rent will be rising quickly to much higher levels. But as Keynes has pointed out long ago, investment for most people is like the beauty pageant. "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936). What I found interesting is that many bubbles have some rational elements otherwise they would not have formed in the first place. Take Beijing real estate: do apartments with convenient access to subways sell for a lot more? do apartments in districts with better ranked schools sell for a lot more? If yes you see people are still pricing utilities and the market is functioning at the micro level. It is just hard to pin down why the overall price level is so high: - for most people who live in their own apartments, the price is quite irrelevant (they don't want to sell as they need a place to live); - people who hold empty apartments probably subscribe to the "beauty contest" theory of investments (they may rationally think the price high but they couldn't think of a better way of investing); - as far as the government is concerned the wealth redistribution caused by the high real estate price is in the right direction esp. when compared to a stock market bubble: high land auction price means more money to build infrastructure; high ownership ratio means older people who are less educated with lower income benefit more and while the young suffer they are more educated and can expect their income to rise rather quickly. Despite the high real estate price Beijing population had been increasing rapidly (would have been even higher growth if not for government control in place). If China on a whole eventually stalls out at Taiwan's level (where Taipei suffers from similar real estate phenomenon) China would have succeeded beyond what most people expect.