Below, a graph of Real Estate Market Prices over a long time period. The index of US home prices is constructed by linking together various available series that were designed to provide an estimate of the price of a standard, unchanging, house.
When I first saw this chart, it was back in 2007, I think. So home prices did not collapsed yet.
It was in the 2nd edition of ‘Irrational Exuberance’ by Shiller. So we were contemplating an almost vertical line for real (inflation adjusted) home prices in the US.
The main takeaways are
- Home prices are not correlated to Building costs, Population, Interest Rates.
- Inflation adjusted, there is no uptrend in real home prices
- Corrections in real estate markets occur
As such, it is surprising to hear so many times that real estate prices always go up (land is scarce, population increases, level of prosperity increase, etc). And this is why it is interesting to look at history.
On the same note, I hear today so many people saying that finance is over. I disagree.
Reading books about history of financial markets helps understanding that things are just cyclical.
Reference:
http://www.irrationalexuberance.com/
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