The New York Fed’s Jason Bram writes,
current rent levels, mortgage rates, and property tax rates make it difficult to account for the high prices of Manhattan co-ops and condominiums in 2011 without assuming an expected future price appreciation of at least 4 percent per year.
It is a nice article on the rent vs. buy calculation. Not surprisingly, much depends on expected appreciation rates.
In Manhattan especially, the marginal price setter is probably paying cash and the discount rate becomes the after-tax real yield on where that cash could be risklessly deployed. That effective bid-offer spread between borrowing and lending rate bridges half of the “overvaluation”.