Economist - Global House Over/Under Valuation Chart

Pimperne1

Wish I knew how to upload the image but anyway:

UK nearly 28% overvalued
France nearly 50% overvalued
Australia 50% overvalued
US (either) 5% overvalued or 11% undervalued depending on provider

http://www.economist.com/node/18925999

The interactive house-price tool provided is interesting too - particularly the house prices vs rent aspect.

1984ReturnsForReal_2

Nice to see The Economist trusting such data to produce their report

Linton

They conclude that houses are over/underpriced by comparing with rents.

Surely, in the UK at least, it's house prices which are driven by the major economic factors. House prices in turn drive rents both because of the ROI for landlords and because the number of renters is dependent on the availability of houses to buy. So it's rents which are wrong. In the case of the UK there would seem to be a correction in progress.

michaels

What I find interesting is their methodology - no long term average income to house price ratios (for all you 3x ers) but they compare to rents which hopefully captures the supply and demand issues the bulls are so keen to mention whenever 'affordability' is mentioned.

One problem with the analysis is that it looks at 'national' housing markets whereas I suspect in the UK there are some areas where demand is lower but rental yields underpin house prices and then there is London where yields are generally poor but lack of supply along with higher incomes (my theory being that higher incomes support higher price:income ratios because other expenditure like food and utilities is a smaller proportion of income) underpin the higher ratios which are reflected in the index showing an overall over valuation.

Linking house prices to rents also provides another mechanism for correction other than house price reductions; rent increases - which sees to be tied in with what we are observing, the fly in the bulls ointment in this case being ignoring affordability for rents results in arrears just as ignoring it for house prices leads to repossessions.

HAMISH_MCTAVISH

Chris Joye wrote an excellent rebuttal to The Economist's article re global house prices.

Very interesting work, although focused on the Aus market.

Many of the arguments apply to the UK market just as well however....

http://www.smartcompany.com.au/property/20110706-housing-bubble-advocates-stuck-with-misleading-data-joye.html

Degenerate

The "long-term average" rental yield is not a useful point for comparison, it can vary greatly depending on the window you set for the calculation, and more critically the average of the past is absolutely no guarantee of the future. For someone considering investing in property, it's much more relevant to compare with what your money could earn elsewhere - with interest rates at unprecedented lows, property is still looking like a good return.