Dazzling
How would I use such an indicator? I imagine such a gauge would be a good indicator as to whether a market is due to run out of steam (or has run out).

To me, housing prices often seem to me to be driven by emotion more than good sense, with folks putting themselves into debt up to their gills based on the promise that ‘you can’t lose in real estate’ and the fear of ‘missing the boat’.

I can’t help thinking that there is a limit to how much debt the market can carry. (The ‘tech boom’ of the turn of the century is a similar example). I’ve since found another thread on the subject (CRASH!!) which alludes to this as well. https://www.propertyinvesting.com/forum/topic/19178.html

An affordability index (income to property values) could be a way of judging the ‘real’ state of the market rather than taking an ‘overvalued’ market at face value.

To use your example above, if the fibro shack (on the market at $600,000) is sandwiched between two ‘castles’, both valued at $900,000, on the surface it might seem like a good deal.

Until you find out that the castles were each bought at auction by a ‘smart investor’ who is negatively gearing them because they are smart and bought them on 100% finance (using equity in another home), also because they are smart.

In my scenario I wonder if the castle owners will have any problems selling their property if they can no longer afford the negative gearing (job loss, interest rate rise, illness…) and there are no more ‘smart investors’ willing to pay a fortune and then pay $X a week for the privilege of enjoying a 4% ROI.

Next in line would be the non-investor, someone who wants to buy the castle to live in. There would be a theoretical limit that this person could afford, which is where the affordability index comes in.

My explanation is probably more long winded than it needs to be but the short answer is, I believe prices can only rise by so much and I’m looking for some sort of non-emotional indicator of where that might be.

Thanks again

bmj