Via Paul Krugman’s blog in the NYTimes: a salient graph if you are thinking of buying a house. Remember the US market is ahead of most of the rest of the world – the big falls re yet to come elsewhere.
…the Case-Shiller 20-city index compared with the BLS measure of owner’s equivalent rent, both deflated by the CPI. The housing bubble had essentially no effect on rental rates.
The chart just demonstrates the impact of leverage and the magnet of capital gains vs income.
Although rental income is important when buying investment property, the market price is set by the owner occupier who does not consider the opportunity cost of owning against renting. It’s this “emotional premium” which has allowed prices to skyrocket (along with lax lending and valuation practices).
If people calculated the cost of “renting” their home they would be horrified. Generally people have been too busy calculating the increase in the “value” of their home to notice. The unearned capital gain is a wonderful thing until it disappears up the swannee.
A classic bubble, no more, no less.
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