BobS
I suggest that for the first half of the 20th century, investors did not build inflationary expectations into their investment decisions. Deflation was a HUGE problem for most of the period up to WWII. The assumption throughout the war was that we would return to a depression after the war’s end. Accordingly, anyone owning rental real estate had to get cash flow to offset the (probably) declining asset price.
By the mid-1960s and thereafter inflation took hold with a vengance. Investors in real estate now were parking their money in a growing asset, so rents could become a smaller % of the long run expected return.
Also, as has been mentioned, financing innovations and increased leverage over the decades played a big part. In the 1920s, home loans were rare and short in duration.
jpinpb, the data used in the chart was not adjusted for inflation. I just did a straight calculation:
ratio = price / rent
So, yes, relative to rents, house prices have gone up a lot since 1940. But note that price/rent ratios have stayed stable for long periods of time. It stayed at 0.4 for 30 years from 1940-1970. Then it stayed at 0.5 for another 30 years from 1970-2000. So the ratio seems to have gone up in steps. I’m not sure if we’re reaching a new step, though. That’s what I’d like to find out.
jpinpb, the data used in the chart was not adjusted for inflation. I just did a straight calculation:
ratio = price / rent
So, yes, relative to rents, house prices have gone up a lot since 1940. But note that price/rent ratios have stayed stable for long periods of time. It stayed at 0.4 for 30 years from 1940-1970. Then it stayed at 0.5 for another 30 years from 1970-2000. So the ratio seems to have gone up in steps. I’m not sure if we’re reaching a new step, though. That’s what I’d like to find out.
jpinpb, the data used in the chart was not adjusted for inflation. I just did a straight calculation:
ratio = price / rent
So, yes, relative to rents, house prices have gone up a lot since 1940. But note that price/rent ratios have stayed stable for long periods of time. It stayed at 0.4 for 30 years from 1940-1970. Then it stayed at 0.5 for another 30 years from 1970-2000. So the ratio seems to have gone up in steps. I’m not sure if we’re reaching a new step, though. That’s what I’d like to find out.
jpinpb, the data used in the chart was not adjusted for inflation. I just did a straight calculation:
ratio = price / rent
So, yes, relative to rents, house prices have gone up a lot since 1940. But note that price/rent ratios have stayed stable for long periods of time. It stayed at 0.4 for 30 years from 1940-1970. Then it stayed at 0.5 for another 30 years from 1970-2000. So the ratio seems to have gone up in steps. I’m not sure if we’re reaching a new step, though. That’s what I’d like to find out.
jpinpb, the data used in the chart was not adjusted for inflation. I just did a straight calculation:
ratio = price / rent
So, yes, relative to rents, house prices have gone up a lot since 1940. But note that price/rent ratios have stayed stable for long periods of time. It stayed at 0.4 for 30 years from 1940-1970. Then it stayed at 0.5 for another 30 years from 1970-2000. So the ratio seems to have gone up in steps. I’m not sure if we’re reaching a new step, though. That’s what I’d like to find out.
