Monday, April 3, 2017

Housing Prices and Wages

The Economist magazine published a chart today that shows housing prices to average income for New Zealand, Australia, Britain, Canada and the United States (U.S.). The chart indicates that home prices are currently 30% to 60% above long-term averages for all of the countries listed except for the U.S. which appears to be close to it's long term average after hitting a low several years ago. 

The U.S. housing market is a big market with significant differences in individual cities and regions. Despite the overall market being near it's long-term price to income average, differences do exist in individual markets. Affordability and valuation appear to be issues in some markets.

Home prices to wages in Las Vegas (where I reside and write from today) have now reached 2007 levels of 8 to 9 years indicating that new homes have reached near peak historic valuation levels based on this metric. So this question is, can home prices go higher, will they go lower, etc. in the near future? The answer is unknown and bulls and bears have different opinions.

I recognize that this snapshot does not take into account the myriad of factors that affect wage growth and housing prices which include, household debt levels, population and demographic trends, consumer spending, business migration, employment trends and interest rates, among other factors. On the other hand, I have also found the relationship to be useful for thinking about valuation and forward looking expectations. I also know that housing prices have moved up at a faster rate than wages since the bottom which can continue, but not indefinitely, in my opinion.