Another Top-10 List (and you may not want to be on this one unless you bought early) — The Most Overvalued Residential Markets by Country

In my lifetime, I have seen home values in some markets rise to levels that were simply not sustainable given government policy, income levels, economic growth, new construction and inventory of existing housing. We saw that in recent years in many markets in the U.S. when home prices fell by 28 percent from July 2006 bottoming in February 2012. (Since then one-half of the decline has been recovered, however).

So where are the most overvalued housing markets in the world? According to researchers at Deutsche Bank (DB), the following list details the most overvalued housing markets amongst 20 developed countries.

12-17-13 graph

On what methodology did the researchers base their conclusions? The DB researchers examined home prices to income and home prices to rent. Each of these two metrics (how much greater prices to rent and prices to income were currently based on historical norms), were then averaged.

Would I stake my career as economist on these numbers to become realities? No. There are too many other factors to be considered.

Would I use these data as a comparison of how much homes cost on a relative basis when comparing one country to another? Yes. It’s hard not to recognize home price, income and rent as some of the key determinants in supply and effective demand.

Other factors integral to further insight includes job formation rates, demographics, immigration, available alternative investments, interest rates, household formation rates, wealth formation, tax incentives, and the ability for foreign nationals to purchase real estate, just to mention a few.

When I lived in New Zealand in the early 1980s, for example, foreign nationals were restricted in what types and how much real estate they could purchase, accompanied with an onerous and detailed approval process.

As always, to optimize an investment involves both an entrance and exit strategy and accompanying successful timing. Unrealized gains, after a market slips is merely a good story of woulda, coulda, shoulda. The same is true not having bought prior to a market surge.

Ted

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