The world's most over-valued housing markets !

The Economist has compiled some interesting analysis on 20 housing markets across the globe.

 

The data not only looks at house price trends but also compares current prices to their “fair value” which is calculated by looking at the historical average ratio of house prices to rents.

 

Europe’s most over-valued housing market is Spain (+47.6), followed by France (+42.5%), Sweden (+41.5%) and the UK (+32%)

 

Germany and Switzerland are the cheapest markets on -12.9% and -6.4% respectively.

 

Globally, the most expensive market is Hong Kong (+58%), followed by Australia (+63%). 

 

Interestingly the US is around “fair value” at -2.1% according to the Case Shiller national index.

 

 

Painful corrections ahead?

 

The figures suggest that painful housing market corrections will eventually surface in many markets across the globe.

 

However, there is quite a bit of evidence to suggest that housing is different to other asset markets because is it more correlated with affordability (a function of real incomes and mortgage rates) rather than rents.

 

Unfortunately this argument still suggests that painful corrections may be on the horizon.

 

The UK and US seem intent on printing money to “support” their housing markets which will surely cause inflation and therefore interest rates to rise which will undermine affordability.

 

For countries like Spain within the Euro area, printing money is not an option.  If you believe the data, (which comes from asking prices rather than sale prices) house prices still have a long way to fall. 

 

In the medium term, the only options would seem to be significant nominal falls in house prices or a currency devaluation (euro crisis).

 

Optimists will argue that housing markets will not correct because “it is different this time” as long term interest rates are permanently lower and the dynamics of supply and demand have changed (rising population etc).

 

Nobody can predict the future but almost everyone who has ever argued "it is different this time" when defending an asset price bubble has turned out to be wrong.

 

Expect a rocky road ahead.  To paraphrase Winston Churchill, we may just be at the end of beginning of a new era in global house prices.

 

Latest	Q3 2009	1997 - 2010*	Under (-) / Over (+) valued**
on a year earlier
Singapore	23.1	-11.0	18	19.2
Hong Kong	20.6	3.2	-6	58.1
Australia	18.4	6.6	220	63.2
China	9.1	1.9	na	18.1
Sweden	8.9	1.4	173	41.5
Belgium	6.5	-2.9	157	21.6
France	6.0	-7.9	141	42.5
Germany	4.8	-4.4	na	-12.9
Switzerland	4.5	4.1	33	-6.4
Canada	4.5	-3.8	70	23.9
Netherlands	4.2	-6.8	92	23.6
United States (Case-Shiller ten-city index)	4.1	-10.6	102	4.6
United States (Case-Shiller national index)	3.6	-8.6	65	-2.1
Denmark	3.4	-12.2	98	19.4
New Zealand	3.4	1.1	108	20.2
Britain	3.0	-3.0	181	32.0
South Africa	2.9	-0.2	421	na
Italy	-2.8	-3.8	94	10.5
Spain	-3.4	-8.3	157	47.6
Japan	-4.0	-4.0	-37	-34.6
United States (FHFA)	-4.9	-4.0	70	10.6
Ireland	-17.0	-13.8	129	13.2

*Or most recent available figure

**Against long-run average of price-to-rents ratio, latest available rents data