"The most important item, over time, in valuation is interest rates": Warren Buffett Credit:AP But it occurred to me recently that, looked at logically, it just might not be as expensive as you think. Here's the idea. As homeowners, and potential buyers, we're trained to look at the price of the house. We treat it as an absolute number. Higher is bad, lower is good, if you're a buyer (and the reverse if you're selling). Which makes logical sense. But… Economists tell us over and over again that it's not the nominal values of things that matter, but the real value. Getting a 10 per cent raise feels good, but they know that if inflation is 15 per cent, you're actually going backwards. On a more realistic level, you're better off getting a 2 per cent raise when inflation is 1 per cent, rather than a 3 per cent raise when inflation is 4 per cent. We know that intellectually, but we still obsess over the number itself. Our brains love the buzz from a higher number, and inflation be damned.

KKR's latest deal suggests a view that economic strength in Australia and New Zealand is stronger than many outsiders recognise. Credit:Paul Rovere So back to housing. Inflation matters, of course, but there's a greater influence on our wealth when we borrow: interest rates. You don't have to go far to find a Boomer who has a story of 17 per cent interest rates back in the 1990s. But even at today's rates, over the life of a 30-year mortgage, you'll pay more in interest than the cost of the house itself. So interest rates matter. A lot. This is where it gets interesting. While the price of housing has skyrocketed over the last couple of decades (and nowhere more than Sydney and Melbourne), interest rates have fallen. Yet most of the 'housing affordability' discussion centres on prices compared to incomes. Can you see what's missing from that picture? Yep, interest rates. In fact, a 2016 report from CoreLogic and the Australian National University showed that while the average house price had risen meaningfully as a multiple of income, the actual affordability of that house -- the monthly repayment required to pay the mortgage -- was better than 2010 and much better than 2008. Because? Interest rates.

And it's not just me. Warren Buffett, the world's greatest investor, was recently asked about US share prices. His response: "The most important item, over time, in valuation is interest rates". And it's the same for housing. In other words, the average Australian knows how much they can afford to spend on the mortgage each month, and is factoring in lower rates to calculate how much they can pay to buy the house they want. The focus on prices by many would-be owners and commentators continually misses that point. Now, I still think housing is expensive. And I think there are concrete steps our regulators and elected officials could, and should, take to help. In a perfect world, lower rates would have given us more disposable income -- not just acted as a multiplier for house prices. But that's the market in action: You want that house, I want that house, and we'll both keep bidding at auction until one of us decides it's not worth it, or we can't afford it. And saving up for a deposit remains a very big hurdle, which rising prices only exacerbates. And the risks of that market should also, then, be clear. If and when rates go up, that lever will work in reverse. That same monthly repayment (in dollar terms) won't go as far as it once did, so house prices may fall. Live by the sword… Foolish takeaway

Will rates rise? Almost certainly, over time. But here's the thing: the RBA won't act if it thinks it'll cause undue mortgage stress. So those who are thinking 'when rates get back to 7 per cent..' might rethink whether that hypothetical will really become reality. I don't blame would-be buyers for being spooked by seven-figure house prices. It feels crazy. And I don't know that I'd be rushing out to buy right now, either. But if interest rates stay low for an extended period, all that worry might be for nought. And just maybe we can call a truce in the generational war of words. As an Xer, I think you're both getting carried away. Loading New report: The "blue chips" of tomorrow aren't the blue chips of yesterday. If you want to look forward rather than backward, we've released our three best ideas for 2017. Click here to learn more. Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).