A few thoughts about the endless South Sea, sorry... housing bubble debate:
*Housing valuation arguments expressed in terms of price rather than yield, i.e., rental yield. Why? Does it makes sense?
*Houses are assets which produce a stream of rents or imputed rents. Housing is a consumption good, but houses aren't. 'Housing" is a consumption good and a house is a machine which produces it.
*If you know a bond is priced at 110.5, you can't tell if it's over or under valued unless you know a) what the coupon is and b) what the yield curve is. Same with houses. The price needs to be expressed as a ratio to the rent, & compared bonds.
*Financially renting v buying calculations are a more reliable model of valuation: (Net rental yield) - (mortgage rate x average LTV on new lending).
*"Affordability" ratios to income need to be ratios to rent (or to mortgage payments), not to house prices.
*All the historic house price/incomes metrics only ever worked in a relatively stable rent & interest rate world.
*When interest rates nosedived and rents stayed the same - so house prices had to rise, to bring the yields back down.
* In closing: the assumption is that nominal rents are a) sticky b) have a reasonably stable relationship to incomes, which since rent = purchase of housing and housing is a very price inelastic fundamental staple good, is a reasonable assumption.
* The model doesn't assume that the rent/price ratio is stable, but its relationship to other yields is and it's just a normal market mechanism on yields.
Example: if prices were 3x incomes, rents didn't change, rental yields on houses would be about 6%, not sustainable if can borrow at 3%.
No valuation model is perfect, but from a market point of view (assuming free buyers and sellers) it is as good as it gets.
