Is The 2.5 – 3.5 House Price To Income Ratio Still Valid?

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by Dlumb77

2 Observations:

  • Increasing population. Unchanged Land availability. Competition through supply/demand dynamics will surely drive up prices in places that populations is increasing.
  • Low Interest rates. We’re at the end of a 35 year decline in interest rates. With today’s low interest rates (in comparsion to the historical average), you can buy a higher-priced house for the same 30 years worth of mortage repayments (becasue less is being spent on interest).

BTW, I’m in Australia. 2 major differences to real estate bubbles in the US:

  • Non-Recourse loans. My understanding is that the house is commonly the only security for the loan in the US. As such, you can just “give your keys back to the bank” and walk away from the loan. In Australia you can’t do that. The borrower is responsible for the loan regardless of what happens to the house. In previous downturns, rather than a dramatic drops in price, we saw that people simply stop selling and attempt to ride-out the losses. Prices see a slight drop and then years of stagnation.
  • Net migration. Cities like Melbourne and Sydney have added 25%(!) to their populations in the last 10 years, mostly through overseas migration. Forecast migration numbers are unchanged for future years. Any wonder why the competition for houses is so strong?
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Final comment: “You have to live somewhere”. When the whole country is in a bubble you have no choice but to participate as either an owner or a renter. People are renting out tents on AirBnB in their back yards for $90/night in Melbourne! There is literally nowhere “else” to go and sit out the bubble.

Happy bubble watching.


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