I have always thought that it was the price of the land that was the most significant factor in contributing to house prices.
Simple supply demand consideration is that, isn't there FAR less land available to be built on in metropolitan areas and therefore the prices of land (and houses) MUST go up over time.
At this moment in human development populations have exploded, and everyone has moved to cities! There isn't a spare piece of dirt within 15km of the Melbourne CBD. (Except for the West, which is just a **** farm)
Therefore, costs of land has exploded.
It's just supply and demand.
Someone slap me in the face, if I have no idea.
You are EXACTLY right Kennas. Others who try to analyse property prices in the same manner as stock prices fail to see the fundamental difference between the two asset classes.
In fact what I believe happens over long periods of time is the price of *established* land and houses goes up faster than inflation due to the limited supply, plus increasing demand and the increasing real wealth situation.
The *average* price of property will, in most cases, over the VERY long term, track inflation plus a small margin. How can this be? Because the SUPPLY side of property is increased via the building of new houses on land released either further out from the city CBDs, or in rural area's - where hopefully, over time, new towns and cities become established as population grows over long periods of time. You HAVE to consider this factor if you are going to attempt to analyse a property value chart dating back to 1890......
Away from the CBDs and in rural area's, the land is cheap and the cost to build a house is the cost of materials plus labour (not all houses are built by developers for massive profit remember - anyone can organise to build your own house if you want). So these "cheaper" new houses, which end up costing well below median/average, bring the over-all average price of property down to keep it roughly in line with inflation. As affordability in established areas becomes too high, there is greater and greater economic incentive for those who cannot afford it anymore to move further out (or to a new area) to the new affordable housing area. I have seen this happen for example in the mid late 90s when many people I know packed up and moved from Sydney to Brisbane, the central coast, or the Blue Mountains, simply because they could not afford a house here, but could there. And now surprise! Guess what? Brisbane and those other areas are now a lot more expensive in relative terms! Obviously this migration of wealth from Sydney and Melbourne to Brisbane in particular has been a major factor in that?
That, my friends, is how come you can always make good money in real terms from property, even though analysis of average and median prices over long periods of time might appear to suggest otherwise - or at least make one fearful of some sort of great correction being imminent....
That graph above that has been posted so many times on this thread I believe simply demonstrates the current major supply problem we have in Oz for new housing - especially affordable housing. Ie - yes we are due for a "correction" but the correction we need is a big increase in building of new, affordable homes in affordable land areas - either city outskirts of rural/regional centres. If affordable homes are not built, then rents will continue to increase rapidly and in effect the same thing will up hapenning, but it will take longer to work through.
As all that happens over time, the average house prices will adjust back closer to the norm, but that doesn't mean your house in Sydney 10km's from the CBD is going to see any real drop in value.
Capisce?
PS: If you look at the development and population growth of the US through the 19th and 20th centuries you can this exact effect happening, just a lot faster than here.
Cheers,
Beej