Market Oracle claim that the traditional method of calculating the affordability of housing is flawed. It seems that the usual method for calculating affordability is to take into account average earnings and house prices. The graph below represents this.
House price affordability - traditional measure
However, Market Oracle claim that it is necessary to factor in interest rates too and they have produced a graph which includes all three parameters.
They say that the reason that house prices continue to rise is because they are still affordable. They think that house prices are now at the upper limit of a range and so probably will not rise very fast and that it would take an interest rate of approximately to 6% to cause a significant drop in house prices.
MarketOracles HPEI Index
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