Theory of Astronomical Real Estate Markets

I keep on wondering how income to house price ratios soared to 4.5 from a 40 year level of 3. The Economist points out how high housing prices might be the result of an extremely stable global economy over the last 3 decades.

Belief that the business cycle has been tamed for good helps explain why property prices in many rich countries have risen so high and why there has been such a willingness to take on debt at large multiples of income. A less volatile economy makes income streams more reliable and, goes the argument, justifies higher prices for all assets, including housing. A reduced fear of job losses means homebuyers in America, Britain and elsewhere have been content to take out huge home loans.

The reasoning seems to make sense. However, the true test of this theory is in its ability to explain effects of the credit market volatility on the future of US and the global real estate markets.

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