What Happens when Houses are too Expensive to Afford?

I get notifications from Redfin every day on the houses for sale in the neighborhood. Like Louis Gray, I’m often astounded by how much the cost of real estate has been raising in the Bay Area, going from merely “really expensive” to completely out of reach in a matter of 4-5 years. Increased housing prices mean that everything – the amount of down payment, the monthly mortgage, and property taxes – are also raised.
The Bay Area is following in the footsteps of other pricey metropolises the likes of Hong Kong, Manhattan, and Tokyo. The worrisome aspect is that these areas have not shown that prices have a natural halting point, where house prices can stabilize as a high but manageable multiple of the area’s average income. Home transactions in desirable cities have a global market, and most end up being priced out of the city. For the 99%, multi-generational mortgages are starting to be a real financial product.
From an economic standpoint, having so much wealth locked away on a property seems like a misallocation and waste of resources. So much of our paychecks go towards housing, and yet given that we’re working harder than ever before, we’re not even enjoying our homes as much as homeowners (or renters) in the past.
And it’s not as if the situation will improve in the future either. Much like how a small amount of inflation is desired to maintain economic stability, having housing prices raise slowly over time seems like the best solution to encourage home ownership and investment. Runaway prices throw this equation out of balance, and I fear for a time when the average person’s wealth – locked away in a home that is entirely unreachable by an average income – becomes largely hereditary, passed from parents to offspring.