Monday, January 14, 2013

Getting the Best Value for Your Real Estate Dollar


A study by the Economist looks at how real estate prices in various countries around the world have changed over the past five years and whether purchasers are getting value for the money they spend.

Let's open with a chart showing an alphabetically ordered summary of the data by country:


You'll notice that the first measure used is the percentage that prices have changed since the fourth quarter of 2007, followed by the year-over-year price change, the value against rent and the value against income.  The value against rent is a similar concept to the price-to-earnings concept for stocks; the higher the number, the more overvalued the property market is with respect to rent.  The value against income number measures the ratio of prices to disposable income per person.  In both cases, positive values mean that home prices are overvalued and negative values mean that home prices are undervalued.

Here is a bar graph showing what has happened to prices since 2007:


Notice that Ireland has seen the largest drop of nearly 50 percent followed by Spain at nearly 25 percent and the United States at 20.5 percent.  The largest five year price gain was seen in Hong Kong at 86.8 percent followed by Singapore at 24.1 percent and Austria at 23.3 percent.  Canada is in fifth place with a price increase of 20 percent over the five year period.

Here is a bar graph showing the valuation compared to rent:


Canada's real estate is, by a fairly wide margin, the most overvalued when measured against rent, coming in at a value of 78.  Hong Kong is in second place at 69 and Singapore in third place at 57.  Real estate in Japan is the most undervalued with a value of -37, followed by Germany at -17 and Austria at -13.

Here is a bar graph showing the valuation compared to income:


France's real estate is the most overvalued when measured against income with a value of 35, followed  by Canada at a value of 34 and the Netherlands at a value of 33.  The most undervalued real estate when measured against income is found in Japan with a value of -36 followed by China at -35 and the United States at -20.

Back to Canada for a moment.  Canada's real estate prices are either the most overvalued or nearly the most overvalued on two fronts, when measured against both rent and income.  If we look at the examples throughout Europe excluding the Netherlands and France, it is clear just how quickly and deeply a price correction can get these values back to affordable levels.  In the cases of both France and the Netherlands, recent price declines of -1.3 and -6.8 percent will likely push both rent and income valuations back into the more affordable category like the remainder of Europe.

On the upside, for Americans, the five year plus readjustment in the country's housing market has pushed valuations into the affordable category with housing undervalued by 7 percent when measured against rent and 20 percent when measured against income.  With the Federal Reserve's loose monetary policy, mortgages rates are unlikely to rise in the medium-term, keeping the prospect of further price declines relatively unlikely.

Let's go back to Canada as I close this posting.  Canada's real estate prices are either the most overvalued or nearly the most overvalued on two fronts, when measured against both rent and income.  If we look at the examples throughout Europe excluding the Netherlands and France, it is clear just how quickly and deeply a price correction can get these values back to affordable levels.  In the cases of both France and the Netherlands, recent price declines of -1.3 and -6.8 percent will likely push both rent and income valuations back into the more affordable category like the remainder of Europe.

As I've said before, Canada's real estate market is not an island; it is no more immune from the winds of change than the markets in the United States and the rest of the world.  What goes up will eventually come down.  The concern is always how painful the landing will be.

4 comments:

  1. This article is one sided in as much as it measures against 2007. Check how prices increased in Ireland, USA, and Austalia pre 2007 versus Canada and you will see that Canada was Johnny come lately to the Real Estate boom.
    As for prices versus wages - we must be the most underpaid country in the World when you compare current house prices in Toronot/Vancouver to London, Sydney, Hong Kong, New York ..etc. Statisticians can manipulate data to convey any message they wish!

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