Over time prices oscillate around a trendline. Sometimes prices are above the trendline – sometimes they are below. The trendline may be flat or it may be upward or downward sloping.
When prices reach an extreme on either side of the trendline there is a tendency for them to head back towards the trendline or revert to the mean. Oftentimes, prices overshoot the trendline before stabilizing on or near the trendline.
That describes the behavior of reverting to the mean.
The only question left is, “What is the mean?”, and that is the question you are asking.
I think it is 1998 prices because, IMO, that is when the price of real estate and the rent that could be obtained for that real estate started to diverge dramatically (ie, from an investor’s viewpoint, property prices relative to rents no longer made sense).
Other people have different opinions about what the mean is and some people want to complicate the matter by trying to account for inflation.
I’m curious to see what others have to say on this topic.
