The Affordability Limit in Residential Real Estate Markets
Author: admin / Category: Residential Real Estate MarketsAffordability is the ultimate limit of any asset bubble. If prices are so high that no buyer can afford them, there are no transactions and thereby no market. The fear of many buyers in a financial mania is that prices will remain elevated to the absolute limit of affordability permanently. People who have this fear will put every available resource into getting a house before this happens. This becomes a self-fulfilling prophecy as prices get bid higher and higher by fearful buyers.
If prices were to remain at the upper limit of affordability for a long period of time, the rate of price increase would slow dramatically until it only matched the rate of wage growth and inflation because prices could only rise if people had income gains they could use to bid prices up further. If the rate of house appreciation slows down to where it only matches inflation, it fails to have significant investment value. Money would generate much greater returns if invested in other asset classes.