A few weeks ago, The Economist put out its quarterly gauge of house price values. Australia just beat out Hong Kong as the most overpriced market in the developed world, with an overvaluation of 56%. Japan was by far the most undervalued market, with an undervaluation of 35%. The only other housing markets that were undervalued, according to The Economist, were Germany (12%) and the U.S. (7%). (This was well before the earthquake and tsunami in Japan, so it is hard to say what impact those events will have on house prices.)
This same report was a good one to look at regarding the housing bubble as it was popping. In June of 2005, The Economist published an article called "In come the waves" that was quite prescient:
Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust?
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.
-as quoted at Credit Writedowns, June 2008 in Naysayers, the housing bubble was obvious (with Economist 2005 chart for comparison)
What is The Economist saying now? It's pointing to Hong Kong first and foremost:
[W]hatever those 31,000 agents say, Hong Kong homes are not a good deal, according to our latest global house-price index (see chart). In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay. Our index calculates the ratio of prices to rents in 20 economies. In Hong Kong, that ratio is now almost 54% above its long-run average -- and it is still rising.
People in Hong Kong often blame buyers from mainland China for pushing up prices. Ironically, mainlanders often blame buyers from Hong Kong for their own property frenzy. At a recent conference at Tsinghua University in Beijing, students complained that their parents had scrimped and saved to send them to university in the city, but now upon graduation they could barely afford to live there.
Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%. But this is based on the government's 70-cities index, which showed prices rising by only 6.4% in the year to December. That figure seemed implausibly low to many of China's stretched homebuyers, and the Chinese government appears to share their scepticism.
Of the bubble markets where the bubble has popped, the U.S. seems to have corrected the most. Notice that Spain still has massively overvalued house prices according to this measure. Ireland and Britain is also well above the median. Here's the chart:
Edward Harrison blogs at Credit Writedowns, where this piece originally appeared.