‘The bursting of the global housing bubble is only halfway through’.
Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.
To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability. The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies. Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.
Based on Incomes, home prices are 29% overvalued in Canada.
Based on Rents, home prices are 71% overvalued in Canada [The most overvalued by this measure of any of the global markets studied. -ed.]
Canada has an even higher household-debt burden in relation to income than America did at the peak of its bubble.
- excerpted from ‘House of horrors, part 2′, The Economist, 26 Nov 2011. Image from the Huffington Post, Canada, where the story was headlined as: ‘Canada’s Housing Market More Overvalued Than U.S. At Its Peak, The Economist Says’.
None of the above comes as anything new to readers here.
Only wackos like Vancouver RE bears and ‘The Economist’ go on about something as passé as ‘fundamentals’.
Gravity will reassert; we will revert to the mean; perhaps overshoot. – vreaa