keithj, your whole "compositional change" red herring falls apart if you were to simply look at an area that's seen little change over the last 15-20 years and compare price to income ratios (local income to local prices) over time in that specific locale.
But there will always be anomalies. Peoples wages also rise differently. Nurses, teachers can best hope to get pay rises in line with inflation.
Some college drop out decides to write some code and build Facebook/Microsoft has his income rise exponentially. There are so many examples of where people increase their incomes way over inflation. As the economy and population grows you keep adding more and more such high net worth people into the society (look at no. of millionaires now compared to 10-20 years ago).
And it is these people due to their keeping up with the Jones mentality will use their above average disposable incomes towards bidding higher and higher for limited supply of land in established more desirable locations.
To give you an example of popular suburb of Toorak in Melbourne. Imagine there are 1000 houses in Toorak. You cannot sub divide and there is no more land available. Melbourne has 1000 millionaires. They push the average price of Toorak property to $1 million. 10 years later due to economic growth and above average salary rises of certain portion of the population you now have 2000 millionaires. Now there is still only 1000 houses available in Toorak.
The new 1000 millionaires also desire to live in the popular suburb to maintain their status in the community. What gives? Its usually the price. And unfortunately it rises above your average wage rise.
This is the reality whether we like it or not. This is the fairest way we have come up with to make a scare resource available where there is more demand than supply. Economists and FHB don't like and accept this reality.
(PS: Also totally agree with Keith's post about composition being important factor in individual property price rises).
Cheers,
Oracle.
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