Secret #16 – Economic Fundamentals Explain Less Than Half of House Price Changes
An IMF study found that economic fundamentals such as growth in GDP, growth in working age population, and interest rates explained less than half of the house price changes seen in the countries studied.
Another study found economic fundamentals such as lower interest rates, relaxed lending standards, and higher incomes explained about half of the increase in the U.S. house price-rent ratio between 1995 and 2006.
National house prices are determined to an important degree by “non-fundamentals” including national housing and mortgage policies, and future price expectations, not just economic fundamentals.
The longer that I study economics, the more I believe that “economic fundamentals” don’t explain much in the macro arena. Just too much going on - too complex of a system - to be able to explain as much as we might try. I think I’ve given up on economics as a predictive field in any macro arena. It’s all so many guesses and hypothesis.