As with any single number, the circumstances can be played to strip the number much of the meaning. House affordability of the last decade is determined much more by financial policies than by house prices. It is not house prices that were driving affordability, but "affordability" of financing tools was driving house prices. Especially at a "subprime moment", when you can buy with no money down, the role of house price is marginal or purely taken into account.
At a period when house prices variate much more wildly than the income, the particular affordability index is telling rather something else. At times, it may be an indicator of the boom/bust phase. But that also can be distorted. The Australian index 6.6 would indicate a high boom, but in fact they are generally several years beyond that. Here the inhomogeneity lies in the class of houses: the index is inflated by the grandeur housing prices, say, at the waterfront of Sydney harbour. But some Sydney surburbs badly busted recently, while most surburbs beyond central Sydney are in reletaviely slow recession (with house prices reluctantly sliding from the high plateau).
The financial instruments are clearly playing a role, but I suspect that role is being played largely at the lower income levels. (I have absolutely no basis in data for that suspicion, though.) The boom/bust view is probably important. This latest housing boom began back in the mid- to late-1990s, when the America economy was turning in 4% growth every year, and I think that certainly produced a shift in income expectations. (A lot of people, when you look at the jobs that were created at the time, made a lot of money, and it spilled over, in many cases, to guys like me who caught the benefit of an extremely tight labor market.) The low interest rates sustained the boom, along with the financial instruments.
The truth is that any of these could've pushed up demand, and delivered rising prices. All happened. I'm thankful that it seems to be coming to a halt before prices reach the levels we're seeing in Australia and Britain -- the latter having a boom that was (and apparently still is) not limited to a select few areas. As I've mentioned, you can still find big cities in the states where prices remain reasonable, especially for a household with two income-earners. That does not seem to be the case in the UK, even after getting out of the Southeast. Prices in Birmingham and Nottingham are lower than London and Brighton, but incomes are also a lot lower.
I'd make the point that wc may well be correct about the eventual outcome. A price-to-income ratio of 3.7 is high, but not overwhelmingly bad. If it were 6.6 or 6.2 (or whatever the Australian counterpart came in at), I would be sweating bullets. It'll be painful in some areas, but, as always, it's a necessary evil, and it doesn't seem large enough to cause catastrophic effects in the aggregate. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
