House prices
Apr 15th 2010 | From The Economist print
edition
HOUSING markets continue to strengthen, as The
Economist’s latest survey of global house prices shows. Our
periodic round-up was dominated for nearly a year by countries
where house prices were falling year-on-year. But the latest
available data show that in half of the 20 countries whose markets
we monitor, house prices are higher than they were twelve months
earlier.
Since these indicators were last published at the end of 2009,
house-price inflation has quickened in each of the seven countries
where it was already positive. In Hong Kong, prices are more than a
quarter above their level a year earlier. With the exception of
Ireland, the pace of decline has slowed in countries where the
market has yet to turn the corner. In America, two of the three
measures we follow show that prices remain below their level a year
earlier, but the Case-Shiller index of house prices in ten big
cities was at the same level in January as it was a year
earlier.
Singapore has gone from being one of the most depressed housing
markets in the third quarter of 2009 to being the second-frothiest
in the three months to March. This effervescence clearly worries
its government, which has made it more difficult for buyers to
delay mortgage payments and taken steps to deter speculative
purchases. In Canada, another country where house prices are rising
again, new rules announced in February make it more expensive to
buy an investment property and reduce the amount that existing
homeowners can borrow against their houses.
Should other countries consider similar steps? That depends in
part on a judgment about whether prices have fallen far enough to
erase the excesses of the bubble, or whether houses remain
overvalued. One way to get at this is to compare the ratio of house
prices to rents in a country to its long-run average, as our
measure of fair value in housing does.
In Japan, Switzerland and Germany housing-to-rent ratios are
below their long-run average. But even for America, one version of
The Economist’s fair-value measure suggests that the
correction in house prices may have gone far enough. Prices
measured using the Case-Shiller national index have fallen enough
to make houses there look underpriced. In the big American cities
covered by the Case-Shiller ten-city index, the price-to-rent ratio
is nearing its historic average. Houses in America are still
overvalued by around 13% if prices are measured using the index
maintained by the Federal Housing Finance Agency, but this excludes
properties financed using subprime mortgages, many of which have
been sold at very low prices, and so may understate the extent to
which prices have been plummeting.
The story is different in Britain. British house prices had
risen by nearly 10% in the year to the end of the first quarter of
2010, but the country’s price-to-rent ratio still outstrips its
long-term average by nearly a third. This pattern—of prices rising
in markets where houses still look overvalued—is also seen in Hong
Kong, Singapore, Australia, Sweden and Canada. In France, Italy,
Spain and Ireland, houses do appear overpriced relative to their
earnings potential, but at least prices there are still
falling.
