How expensive is housing?

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This is often treat­ed as a “how long is a piece of string?” ques­tion, but The Econ­o­mist has per­formed a great pub­lic ser­vice by allow­ing an easy com­par­i­son of the length of this piece of string across many coun­tries and over time.

Check it out your­self. For Aus­tralian read­ers, house prices today are almost 2.5 times what they were in real terms in 1986; and our price bub­ble (in CPI-deflat­ed terms) turns out to be small­er than some coun­tries (notably Bel­gium’s) but larg­er than the USA’s and UK’s.

Like all such exer­cis­es, it is lim­it­ed by the time series from which the data is tak­en: the ear­li­est data shown here is for 1975, which is after the sec­ond major finan­cial cri­sis of the post-WWII era (the first was in 1966) but at the end of what was, for its time, a very large prop­er­ty bub­ble. So the ref­er­ence point of 1975 could itself rep­re­sent a “high­ish” point for house prices, rather than “fair val­ue”.

The data is also short for some coun­tries, and with a dif­fer­ence ref­er­ence date (say 1987 rather than 1976) the rel­a­tive rank­ing of coun­tries changes sub­stan­tial­ly. A quick look at the Heren­gracht Index–which shows the CPI-deflat­ed val­ue of hous­ing along a wealthy canal in Ams­ter­dam between 1628 and 1972–shows how impor­tant the start­ing date can be in work­ing out whether hous­ing is “expen­sive” or “cheap” at any point in time:

The impor­tant macro­eco­nom­ic issue which this data alone does­n’t address is the lev­el of debt that house price infla­tion has led to. It is prob­a­ble that a high­er real house price reflects a big­ger ratio of mort­gage and oth­er pri­vate debt to GDP, but this isn’t nec­es­sar­i­ly the case. That ratio is the key indi­ca­tor of whether a coun­try is going to expe­ri­ence a debt-induced reces­sion.

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