The highly regarded Robert Shiller writes:

HOUSE prices in the US have been falling for nearly three years, and the decline could continue for some time. Even the US Government has projected price decreases next year. As a baseline, the stress tests recently performed on the big US banks included a scenario with a total fall in housing prices of 41 per cent from 2006 to 2010.

Their “more adverse” forecast projected a drop of 48 per cent – suggesting that important housing ratios, like price-to-rent, and price-to-construction cost – would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.

Missing from this analysis is the difference between land price and land value.

Land price represents what the current market can convince people to pay. Land value is what can actually be earnt off the land, reflecting the genuine value that should be offered when buying a property. When the difference between land value and price is great, we have market distortions such as the staggering overbuilding in the US housing market.

John Young expands on this here.

The ponzi-like nature of the land and housing bubble was orchestrated by the government’s continual nod to those in the know to speculate in land (and with that housing). If the community created land rent was collected by the government, there would be no room for speculators to enhance housing scarcity in order to manufacture profits.

If only US house prices were easier to find we could display this in statistical terms.