The Margin of Safety and House Price Turning Points: Observations from the US, the UK and Japan

Abstract

Using quarterly data from 1960 (UK), 1963 (US) and 1977 (Japan) through 2009 (all three markets) we examine long run mean reverting relationships between house prices and: inflation, disposable income, GDP and rents. We find that at the end of Q3 2009, US prices are below their mean reverting levels and at the lower end of their historic range. In contrast, UK and Japanese prices are at, or slightly above, their mean reverting levels. Furthermore, the expansion in Japanese prices during the late 1980s and early 1990s far surpassed any expansions observed in the US or the UK, over the observation period.

Keywords: Household Finance, House Price Crash, Wealth Transfer, Deflation, Inflation

JEL Classification: D1, D31, D84, D91, E21, E31, E32, G12, R2, R21, R31