First of all, I don’t think there is anything to justify a permanently higher plateau. But I do have a couple observations.
1. Like the tax changes in the 70’s mentioned above there was a significant tax change in 1997 for personal residences. The change is the capital gains tax exclusion on the first 250K (or 500K if married) on the sale of a primary residence.
Over the long term, this could effectively makes a primary residence a little more attractive over the long run, if everything else were equal. I would expect this to raise the ratio slightly (maybe by 5 or 10%) not the 60% increase shown.
2. The ratio of an asset price compared to income or rent derived from it can be interest-rate sensitive. For example, one might be happy to pay $100,000 to buy a property that rents at say $1000 per month when bonds or alternative investments are in the 5% range. However, if alternative investments are paying 15%, it doesn’t look so hot. After a long-period of declining interest rates from early 1980s until now I would expect some upward bias in the valuation on your chart. Going forward, I think the trend will at best be flat rates and perhaps significantly higher rates, so this would not help the higher plateau theory.
