Are global house prices overvalued?

A couple weeks ago the Economist published an article, “Global House Prices: Floor to Ceiling“.

In it, they argued presented a chart suggesting that most countries’ housing markets were “overvalued.”  This whole article didn’t work for me.

The criteria they used to determine what countries were overvalued, and by how much, was the long-term average rent versus the average ownership price.  A big change in ownership price, versus rental rates, means overvalued.

The most overvalued places include Hong Kong, Australia and Singapore.

But these are places that are substantially urban, and with strong demand from regional and global people to move there.  Hong Kong is, for all intents and purposes, a city-state as is Singapore.  Australia is a desert island with a few major metropolis around the outside–such as Sydney, Melbourne and Brisbane–which have been popular migration points for native-born as well as immigrants.

The more people that want to live in a city, and in its cool, hip urban core, the more prices will go up.  It’s a supply-demand issue.  Overvalued would suggest that either demand is expected to wane, or somehow supply will catch up.  But in big cities there is no more land to develop close to the big employment nodes and the core area (the essence of the city), so supply can’t really catch up.

Saying a country’s housing market is overvalued, therefore, is to suggest that people will stop migrating to the major cities.

I don’t see that happening in Australia, Hong Kong, Singapore or Canada.  Do you?

It is also interesting that the Economist data also suggests Japan’s housing market is undervalued, and there is a country with an aging and declining population that is not attracting global migrants.  Personally, I’m not going to run out and buy property in Japan.

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  2. Global Urbanist says:

    I find supply-demand of housing does not relate to housing values. Housing supply is a very elastic measure. A two bedroom condo can house one urban professional with an office, two roomates, or a family of four, so it’s difficult to say x condos will house x number of people.

    The financial environment influences housing prices far more than supply and demand. Long term mortgages, at x interest rates, with y downpayment required combine to create the monthly payment for housing costs (whether rent or mortgage). With housing leverage at 4 to 1 from a 25% downpayment, a change in interest rates is magnified by 4. A 6% increase in interest rates usually means a 24% increase in monthly payments. At a macro level people’s housing costs do not change, just where the money will go. In this case it will be more toward interest and less toward equity or housing value.

    The claim that housing prices are over-valued has more to do with the financial environment than with people moving to cities. Even in the dark ages of early 1990′s Toronto, people still moved to the city despite downward spiraling housing values. Analyst see that interest rates around the world are very low, placing housing values at a maximum. Going forward is everyone going to be like Switzerland and keep interest rates at 2% over the next thirty years, or will interest rates rise for whatever reason causing a housing value decline? The analysts are betting that the world is less like Switzerland.

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