patrick.net

Dotted line = price to income ratio
Solid line = price to rent ratio

Many people compare the United States' current economic difficulties with Japan's problems 15 years ago. Japan experienced a major credit binge due to loose credit markets which produced high asset inflation in the 80's. Japan also had their unsustainable housing bubble pop, theirs in 1992. Japan has been known for their major central bank intervention, zombie banks, and extremely low interest rates for the last 20 years. Japan has an aging population and experienced sharp declines in their total fertility rates shortly after the 1940's. Their housing bubble collapse was 50 years after their decline in fertility rates.

In 1955, the U.S. had high fertility rates similar to those of Japan in 1940. Both countries witnessed a halving of their Total Fertility Rate about 15 years after their peak. Subsequently, 50 years later both countries had their housing market collapse. Why? The shrinking demand of new entrants into their housing market could not support their excessive supply.

15 years apart, Japan and the U.S. had a surge in the population of 40-55 year olds prior to their housing collapse. At this age people are at their peak earning and spending years. This created an excessive demand in the credit markets which resulted in excessive money creation through fractional reserve banking. This produced inflation wherever the new, easy money was spent.

For the last 20 years, the Japanese government has been trying to re-inflate or minimize the bubble's impact to prevent the deleveraging of their unhealthy economy. There is nothing Japan's government can do to stop the adjustments in their demographic transition. These adjustments are why the graph shows "affordability” but still declining asset prices. When there are fewer people bidding to buy an excessive quantity of something, the price tends to fall. Likewise, in the U.S., The 50% decrease in demand is, and will be, too much to sustain current asset prices even if they may be "affordable”.

http://articles.businessinsider.com/2012-04-09/markets/31311630_1_chart-housing-bulls-ratio

Look at Total Fertility Rate
http://en.wikipedia.org/wiki/Demographics_of_the_United_States#Vital_statistics
http://en.wikipedia.org/wiki/Demographics_of_Japan#Vital_statistics

#housing