I disagree with you that house prices exceeding inflation is unsustainable. A better argument would be house prices exceeding real wages growth is unsustainable, because real wage growth has always been higher than inflation in the long run.
Sure, I use them almost interchangeably when talking about housing, because real wages are mostly flat over the last few decades, so inflation and wages have been the same, save for the top 1%, but technically correct, wage growth is the more important factor.
We have run it for a few decades. It is still going up. You may think no one can afford to live anywhere but the city carries on. The median house price here in a city of 4.5 million is over $1.1million and climbing. It's not just a small pocket.
You understand how compound interest works. It kicks in fierce at the back end. That's why someone at 60 who has been stocking away since their 20s (40 years) versus their 30s (30 years) has SO MUCH more. That extra 10 years on the back end.
Yes, it may have grown for decades. But it's not sustainable. 1.1MM (the current amount) really isn't that much. But if the houses increased 10% this year, that's another 110k higher (say, about double the average annual wage). Then 10% next year. Then the next year. And the next year. Keep going and soon it gets silly. It's literally not sustainable.
I mean, say house prices go up by 10%, and inflation/wage growth is 3%. Prices go up by 7% real then. Run that out another, say, 30 years, when you'll be in your mid-60s. The median price will be 8.37 million in today's dollars. That's nonsense. The median wage will be the exact same (since we're talking in real dollars.. in nominal, it'll be 2.43x higher, but then the housing prices in nominal dollars will be 17.45x higher, at 19.19MM). Even if one put down 50% (so the mortgage balance was 4.18MMM) and got a 5% rate, their monthly P&I (ignoring taxes, insurance, and all other costs) would be $22,439 (in real dollars). Annual? 270k. Literally 1% of the population could afford to buy, and no one would--it wouldn't make sense to buy.
That clearly is not sustainable, right? If the prices today were 8.37MM for the median house price, with all wages staying the same (which is what we're comparing when we use an increase above inflation/wages, and then run it out a few decades), would you agree that such a situation couldn't be sustainable?
Now add another decade, to put it out 40 years. Suddenly home prices are 16.4MM in real dollars. Another decade? 32MM (we're about doubling every decade, with a home value growth of 10% and inflation of 3%, so roughly 7% real, using the rule of 72). 10 more (so we're at 60 years out, maybe about the time your future kids are in their 40s or 50s, since you mentioned being worried about them being able to buy in) and we're at 63.7MM. At that rate, even if one won the lottery of 50 million dollars (in real, 2016 dollars) and use that as an entire down payment, their monthly payment on the remaining 13.7MM balance would be 73,765 per month! Someone winning 50MM in the lotto and putting it all down on the average
house, and still having the monthly payment be higher than the median annual wage is obviously crazy.
Like I said, run scenarios out where increases are above inflation/wages. It just doesn't work.
Worrying about your kids, decades from now, "not being able to buy in" is a crazy worry, IMO.