[deltateam]

things aren't overvalued if the money supply has been increasing, which it has

if more dollar units exist, and the same or less purchasable units exist, then purchasable units have a value in more dollar units

the people increasing the money supply had an idea about what other people would spend the additional money on, but economists never predict human behavior accurately. but it doesn't really matter, the primary recipients of the additional supply are their friends.

[toomuchtodo]

> things aren't overvalued if the money supply has been increasing, which it has

If housing prices disconnect and accelerate away from what incomes can support servicing a mortgage, housing is overvalued. If PE ratios start to become wildly unjustified, equities are overvalued. This is regardless of money supply.

[deltateam]

> If housing prices disconnect and accelerate away from what incomes can support servicing a mortgage, housing is overvalued. If PE ratios start to become wildly unjustified, equities are overvalued.

> This is regardless of money supply.

When vast amounts of money are added to the ecosystem - the economy in this case - the recipients all have the same choices of what to do with the money so that they don't lose it or have less of it. When the expectation is the even MORE money will be added to the ecosystem, then the market participants need to increase their own money faster than the rate that an individual money unit has less ability to purchase its share of the economy.

You have choices across the yield curve which dictate the velocity in which you increase your own supply of money. Some choices are below the expected rate of new money units, so you are expected to lose purchasing power. Other choices are expected to be above the rate of new money units, and this includes housing and stocks.

If there is an excess of money and the purchasable units are not increasing at the same speed, then they will increase in price.

Regarding "overvalued" in the terms of particular asset classes, yes, things can disconnect from this rate of change.

The way we are using that term is fundamentally different and counterproductive to go into a hole about. I am using it to make a simple point: the money will go somewhere.

[ultraluminous]

1) That assumes that what drives housing prices is residential ownership.

2) What is a "justifiable" P/E multiple? What is the justification (other than past values) for _any_ P/E ratio? What were the drivers of either the numerator or denominator?

This is to say, that macro and micro economics try to model extremely complex systems. When trying to analyze "value" it's worth considering that your mental model might not be accounting for many/most of the relevant forces.

[tempestn]

Ultimately a P/E ratio should be justified by discounted future expected returns, compared to the risk free rate. So ultimately, the P/E ratio is a market prediction of future earnings growth.

[Applejinx]

In the former case you're assuming houses are for living in. That's a human perspective (and one I share) but the capitalist perspective is that houses are stored value and can be even more valuable if they're empty and well guarded. They become another sort of bitcoin, but backed by the reality of tangible property.

[toomuchtodo]

Depends on the jurisdiction, right? In several parts of Europe, they put RE ownership restrictions in place because they value housing as housing above value storage. In the US, not so much. Note the decline in foreign purchases of RE in Vancouver when they started taxing those transactions because people living in Vancouver were prioritized over Chinese dollars flooding the market.