Australia 40% Overvalued: Worldwide Ranking of the Most Over and Undervalued Housing
Australia 40% Overvalued: Worldwide Ranking of the Most Over and Undervalued Housing; Canada tops the list of overvalued housing markets, with an overvaluation of 60%
Tweet Topic Started: 12 Dec 2013, 01:52 PM (2,065 Views)
It’s perhaps hard for anyone who owned property in the U.S. before 2007 to believe, but housing prices in many parts of the world never really went through a proper adjustment and have continued to climb to new heights.
According to analysis by Deutsche Bank economists, that’s left some property markets well and truly in overvalued territory. Based on their analysis, anyone in the market for property might want to avoid Toronto or Vancouver. On the other hand, if you can get around Japan’s restrictions on foreign investment, an apartment in Tokyo looks like a steal.
The work by DeutscheDPB.XE +0.22% economists Peter Hooper, Torsten Slok and Matthew Luzzetti ranks different countries’ housing markets according to an average of two ratios: home prices to income and home prices to rent. Those metrics are calculated for each country on the basis of how far or below they are from their historical norms and then combined with equal weights to come up with an overall estimate of over- or undervaluation.
Canada tops the list of overvalued housing markets, with an overvaluation of 60% from historical averages, followed by Belgium, New Zealand, Norway and Australia. At the bottom: the U.S., Greece, Germany, South Korea and, last of all, Japan, with an undervaluation of 39%.
Although the Deutsche team doesn’t delve into them, it’s not hard to think of some key reasons for these differences. Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. For its part, Belgium’s home prices could be distorted by soaring prices in Brussels as the European Union’s economic and financial troubles have inevitably increased the business of the EU and prompted an influx of diplomats into a city that functions as Europe’s capital.
These data also underscore the dilemmas central banks face in various countries. Canada’s, for example, is grappling with a slowdown in its economy and a worrying stagnation in consumer prices that’s raising the risk of deflation. But sky-high house valuations make it difficult for the Bank of Canada to cut rates to spur aggregate demand. A similar problem exists in Australia, where the Reserve Bank of Australia would probably love to cut rates in order to drive down what it believes to be an overvalued Aussie dollar but must instead keep a wary eye on home prices.
Meanwhile, the U.K.’s relatively high seventh-position rank underscores concerns that its recent economic revival has been overly driven by government incentives to encourage mortgage borrowing and that such policies have meant that the housing market prematurely recovered from its 2007-2008 collapse before it had flush out its excesses.
By contrast, Germany’s and Japan’s sluggishness speak to the fact that consumers in those societies are still incentivized to prefer savings over spending.
In fact, it’s possible to read Deutsche Bank’s rankings as a snapshot of the world’s economic imbalances.
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
That sounds about right. Remember they are talking about property prices which have two components – structures and land. Structures are worth what it costs to (re)build and not a cent more. The variable value is land. Here in leafy Balwyn with well amortized houses, land is +80% of property prices.
Revert to mean – even without a market-clearing overshoot – would devastate the third of households with a mortgage. Australian residential land prices recovered from the 1928 peak in the 1960s. No wonder the ‘silent generation’ was debt averse.
That sounds about right. Remember they are talking about property prices which have two components – structures and land. Structures are worth what it costs to (re)build and not a cent more. The variable value is land. Here in leafy Balwyn with well amortized houses, land is +80% of property prices.
How would someone come up with a figure of 40% ? I agree with you that structures are tangible assets but land has an intangible value, if in your leafy Balwyn the land component is 80% of the property price it is because that is its true value. Property prices may go up and down depending on what people are prepared to pay for it but only the structure itself can be over or under valued. The land as an intangible asset is valued at the property sale price which someone was prepared to pay for it minus the cost of the structure, so unless someone overpaid 40% for the structure itself the property price is just right .
How would someone come up with a figure of 40% ? I agree with you that structures are tangible assets but land has an intangible value, if in your leafy Balwyn the land component is 80% of the property price it is because that is its true value. Property prices may go up and down depending on what people are prepared to pay for it but only the structure itself can be over or under valued. The land as an intangible asset is valued at the property sale price which someone was prepared to pay for it minus the cost of the structure, so unless someone overpaid 40% for the structure itself the property price is just right .
Careful, common sense doesn't normally work with these bears.
That sounds about right. Remember they are talking about property prices which have two components – structures and land. Structures are worth what it costs to (re)build and not a cent more. The variable value is land. Here in leafy Balwyn with well amortized houses, land is +80% of property prices.
Revert to mean – even without a market-clearing overshoot – would devastate the third of households with a mortgage. Australian residential land prices recovered from the 1928 peak in the 1960s. No wonder the ‘silent generation’ was debt averse.
Don’t Buy Now!
Careful David, you don't want to end up like Keen. For your sake I hope you have a plan B.
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
So... let's just say you were repeating this experiment.
To keep things simple, you only use three years, and year one always represents fair value, and year three always represents current pricing.
If you were say, a country that had a massive bubble last year, and you were still in the process of correcting, what would this methodology make our pricing look like?
Year 1, Year 2, Current Year $100, $500, $200.
Historical Average = $300, Current price, $200. Wow! Look at that, prices are 33% below fair value!. Oh wait, didn't we just say year 1 was fair value?
Now, just say we had a country like Australia, that really hasn't had any price growth for a decade... What would that do to our numbers?
Property speculation is a type of gambling... But everyone knows that in gambling, the house always wins in the end.
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