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Friday, January 21, 2011

The Housing Bubble Arguments (part 1a)

There was a lot of discussion how CPI is not good measure for house price adjustments. I agree with this statement to some extent. To show more realistic house prices we created data set for House Price Index adjusted for all male wage. All male wage is used because it is the longest available wage data set from ABS.

Chart 1 shows House Price Index adjusted for All Male Wage Index. It shows how house prices change relative to All Male wage since 1961. It was oscillating around the average value until late 1990s. To reach now more than twice the average levels form period 1961-1997.

Chart 1 House Price Index adjusted for all male wage

Chart 2, in addition, shows employment index. Normalized employed persons as a percentage of  total population. This series is used to show how increased employment affected house prices. It is clear that slow but constant rise in employment is not responsible for sudden house price jump in late 90s. During the jump in employment in late 70s house prices even dropped slightly.

  Chart 2 House Price Index adjusted for all male wage vs. total employment index 

These two charts clearly show unusual jump in house prices adjusted for the most realistic measure. House prices need to drop more than 30% to return to historical levels. More than 30% drop is needed because increase in employment happened in part-time and women employment. Shown house price index is adjusted for male wage which is significantly higher.

House prices are obtained from  ABS (2006-2010), REIA (1986-2006) and BIS Shrapnel 1960 - 1985.

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