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Our quarterly index reveals the world’s most overvalued homes

Global house prices

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1-12 of 12
Mar 4th 2011 1:19 GMT

"Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%." Wow. where did this figure come from? In every major city in China (Shenzhen, Guangzhou, Hangzhou, Xiamen, etc) rents are a fraction of 30 yr mortgage payments. I rent for USD600 per month equivalent. To buy my apartment would be USD400k+ with 40% down and 6%+ financing. This is very representative in the kind of delta of rents to assets valuation. For cities like Shenzhen and Hangzhou it's worse. I have friends in Shanghai who rent for USD1000 per month, assets market prices are at over USD1million. There is conservatively 40% inventory of empty apartments in our city, average wage is around RMB2500 per month. I think in a few years, if not sooner, we're going to see this unravel. You got a small population with tons of cash and few low-risk real wealth generating opportunities that are bidding up the market price, while a huge number of locals are disillusioned or leveraging to the hilt. Locals I know have 70% of their monthly income going to a mortgage payment on a flat that they put 3 generations of savings on as a down payment.

ook_Boo wrote:
Mar 4th 2011 3:42 GMT

Given the variety of the markets in Canada and the US, it would be much better to work in meaningful units, such as groups of postal/zip codes.

Matt Cooper wrote:
Mar 4th 2011 10:41 GMT

Australian housing is vastly, dramatically overpriced, by all reasonable measures. Unchecked commodification of shelter for the population has been caused by misguided governments failing to regulate the housing market while encouraging the use of tax loopholes like negative gearing and permitting over-leveraged speculators to bid up asset values so the govt can benefit from huge intakes of land tax, rates and stamp duty. The recent analysis by The Economist is right on the money, and you can see from the chart gallery below (including two charts from The Economist house price web tool) just how overvalued Australian housing really is.....

Australian Housing Bubble Charts

12 months ago there was complete denial that real estate was in trouble, but now the realization is beginning to dawn on many that something terribly serious is about to occur in Australia. The spruikers maintain faith in a soft landing, but they're straight out of luck this time. The bigger the boom, the bigger the bust, and the property boom that began in Australia in the nineties evolved into the greatest real estate bubble known to mankind. The bust that's coming will be a doozy. As 2011 unfolds the spruikers will come to understand that real estate in Australia is dead for generations. For anyone who's interested in reading some excellent blogs about the Australian property bubble I highly recommend the blogs hosted on the Australian Property Forum.....

Australian Property Bubble Blogs

During the next two years we can expect to see vacancy rates and inventory levels surge to unprecedented levels as house prices collapse by up to 40 or 50% in most parts of Australia. This might sound extreme, over the top. But how over the top were the 200% to 300% rises in house prices we saw over the past decades. A 50% fall is nothing in the scheme of things, it just brings prices back to a fair level. House prices always revert to the mean and Australia is no different. All the nonsense dreamed up by spruikers about shortages and population growth, it's all just hot air, designed to breath more life into the bubble. A vain attempt to blow new life into a dying bubble justifying more unsustainable price increases to already exorbitant asset prices. But the air has run out. Consumers are tapped out. There is no more money left. The bubble is dead. Long live the new new paradigm, where an average family can finally afford a decent home in Australia. It's been a long time coming, but soon it will be time for the bears to party. Bring it on!

Matt Cooper
Australian Real Estate Crash Forum

KathyMB wrote:
Mar 5th 2011 10:44 GMT

"Home prices in Australia’s eight state capitals..."
That's quite amazing for a country which only has six states. Clearly, Australian property is very overvalued - to the tune to two new states, in fact.

Seraf wrote:
Mar 5th 2011 10:39 GMT

I live in Sydney and I am In Real Estate. Our local markets have risen dramtaically for these reasons:

1.Easy Credit, escpecailly to people who should never have been given a loan, coupled with government incentives to first home buyers.

2.Low hosuing starts, local and state governments levy to many taxes on developers making it unprofitable.

3. local government planning regulations do not allow developers to make full use of the land in order to make it profitable to proceed.

4.Very poor infrastructure upgrades and planning by local and state government authorities, makes it even worse for developers to even consider building new homes.

The bottom line in Australia is that local,state, and federal governments have no idea about how to address the supply issue.

Our banks ,(We only have 4 major banks) refuse to lend to developers unless they stump up with 50% cash equity on total costs, and achieve 100% pre-sales before they will release the construction funds to the developer.

So who bothers to build? It could take a developer 12-18 months to sell 100% off the plan,with the interest clock ticking eating away profits before you even start building.

So these are the major reasons why Australian housing prices are a joke,theres only 21 million of us and our major cities like Sydney with a lousy 3-4 million people are more expensive than New York and Paris.

Even our retail rental rates (per foot)per meter are as expensive as parts of New York City, and New York has triple the population ,work that out. Yes Australia is heading for a major correction thats for sure.

Please someone spare me.

Its an out right joke and when the market finally tanks which will be when interest rates hit double digits, and this is a real possibilty now for a whole lot of reasons:

1. Big spending high borrowing Federal Labor Government(Socialist left with no idea,could't run anything without losing money on it),this government borrows more than the private sector.

Our government was handed a $22bill surplus by the outgoing conservative Howard Government and within 2 years spent that and wracked up a deficite of over $50bill on failed government iniatives and programmes.

1.Our mining industry is going through the roof with demand for minerals at all time highs placing a lot of upward pressure on wages and demand for labour which is in short supply.

Australia is headed for a perfect storm, high borrowing and spending governmemts coupled with a mining industry in overdrive spell high interest rates in the short to medium term.

Once rates hit 10% hear which will happen in the 1st 1/4 of 2012,this will spell the begining of one of Australia's biggest property crashes in its short history.

And you heard it right here first.

Be warned Australians.

Bob_WA wrote:
Mar 6th 2011 5:12 GMT

I wonder why the conclusion is that houses are over-priced in Australia and Hong Kong? It would be equally valid (but less popular) to say that rents are cheap. Certainly in Australia the issue is rapidly rising population and the building industry not keeping up, because potential buyers face rising interest rates (compared to two or three years ago). There is no "bubble". House prices are not likely to collapse unless immigration stops, and the building industry gets a lot more work and a lot more workers. If you don't expect those things to happen then there isn't much down-side to worry about. Single income families are struggling but two-income families are getting by. Often the household includes grandparents who look after small children.

James Z wrote:
Mar 6th 2011 10:53 GMT

All the reasons given for why australian property is overpriced are perfectly valid, but I have to agree with bob_wa that so long as there's a shortage of housing and continued immigration, the price of properties will remain high. This shortage is real because it's reflected in real rental prices, which has been going up and up and up in Sydney. I am a first home buyer myself but have decided to just buy since the housing shortage issue is not something that can be addressed overnight.

cjared wrote:
Mar 8th 2011 2:18 GMT

In Asian cities, I wonder what the pension assets are of the individuals so keen on owning property but leaving it empty (not leasing it). In Asia, the SME rules. These small businesses do not have pension plans. The SME owners instead collect real estate. My building in a nice KL hood is only about 45% occupied.

Also, the average household size is still larger than those in the west. My observations suggest the demand is there to live in more nuclear households, and independently as young adults. This would suggest housing demand is no where near satiated.

Mar 8th 2011 6:30 GMT

Your article says: In America, prices may have overshot a little. Using the Case-Shiller index of prices, the market looks undervalued by almost 8%.

But the table says the market is overvalued +3% in America

Dissavowed wrote:
Mar 8th 2011 6:53 GMT

In 1997, according to the Office of National Statistics, the UK national average wage was £16,666.
According to the Nationwide Building Society the Average House price in 1997 was £55k.
£16,666/£55,000 = 3.3x salary [mortgage]

* The Average First Timer Buyer mortgage in 1997 was just £41.5k [CouncilMortgageLenders]

By 2007, at the peak of the boom [according to the Office of National Statistics] the national average wage had risen to £23.5k
The Average House Price in 2007 was £185k.
£185,000/£23.5k = 7.8x salary [mortgage]

Conclusion:

The last time house prices followed their long term inflationary affordability as a proportion of household income was the mid 1990's.

It is clear that if prices fall to the same level of affordability relative to median household income earnings and interest rates, as they did in the mid-1990s, we are still looking at a 50% + fall, from 2007 peak prices.

The Average house price would need to fall by around 60% in value, from its peak 2007 valuation, to return to historically acceptable inflationary affordability of 3 – 3.5x salary

[Over two thirds of the UK earn less than average wage. In 2008 an ONS survey showed that over 6 million people earn £10k per annum or less. These included Hairdressers and Cleaners.]

Year after year we have seen house prices rise further and further out of our reach.

Forced to waste tens of thousands of pounds in rent. To a liar loan landlord. Because of Labours sheer, evil incompetence, and the banks greed and theft.

You seem to have conveniently avoided mentioning that without the bank bailouts, house prices would have already crashed by 50% + and reverted to their long term median average affordability of circa 3 - 3.5x salary.

But instead of a return to a 'free market' the taxpayers who do not own property, are having their money, via taxes, low IR and QE, stolen [by policies implemented by Labour], to pay for this toxic mortgage debt.
Thus Keeping houses massively overinflated, ensuring FTB can never afford their own house.

A debt transfer has taken place then. [Polite language for THEFT.]
For you to win, the rest of us have to lose. [Largely Because of Labours incompetence Theft and Cronyism]

The average age of a FTB is now about 38 years old.
And just think where we would be, if this had not been allowed to happen?
Probably got a house ten years ago, and paid most of our mortgages off, and be living a normal life.
Instead, we have been forced to waste tens upon tens of thousands in rent, paying off a liar loan landlord......

Bring on the Global Revolution.

ewakorn wrote:
Mar 8th 2011 10:28 GMT

The theory that the price should reflect the rent has a basic flaw.

Among those cities that see inflated prices like Hong Kong, Sydney, London and Singapore, most likely a lot of the properties (especially high end residential) are not bought by the locals.

These foreign (or non-local) buyers don't care about the rental income because they regard the property as a refuge, i.e. residence for their children when they go to school there or a place to flee/retire in case there is any political change in the country they live in,...etc.

Those properties are just safety bets like, i.e. Gold, for them. And it is a much better investment than Gold since Gold does not yield any income.

Unless there is dramatic political/social/economic change in the above cities, their properties will be always hotly pursued.

Houshu wrote:
Mar 10th 2011 3:59 GMT

"Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%."

To calculate China's real estate by the whole country is meaningless, you have to separate the costal cities from interior. Shanghai's price/rent ratio has been in triple digits(!) for the last ten years.

Back to top ^^
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