Canada is recording sky-high prices thanks to wealthy individuals looking for places to park their cash, such as here in Toronto.
It’s perhaps hard for anyone who owned property in the U.S. before 2007 to believe, but housing prices in many parts of the world never really went through a proper adjustment and have continue to climb to new heights.
According to analysis by Deutsche Bank DBK.XE -4.08% economists, that’s left some property markets well and truly in overvalued territory. Based on their analysis, anyone in the market for property might want to avoid Toronto or Vancouver. On the other hand, if you can get around Japan’s restrictions on foreign investment, an apartment in Tokyo looks like a steal.
The work by Deutsche DPB.XE 0.00% economists Peter Hooper, Torsten Slok and Matthew Luzzetti ranks different countries’ housing markets according to an average of two ratios: home prices to income and home prices to debt. Those metrics are calculated for each country on the basis of how far or below they are from their historical norms and then combined with equal weights to come up with an overall estimate of over- or undervaluation.
A chart taken from Deutsche Bank’s report on world housing market valuations.
Deutsche Bank, OECD
Canada tops the list of overvalued housing markets, with an overvaluation of 60% from historical averages, followed by Belgium, New Zealand, Norway and Australia. At the bottom: the U.S., Greece, Germany, South Korea and, last of all, Japan, with an undervaluation of 39%.
Although the Deutsche team doesn’t delve into them, it’s not hard to think of some key reasons for these differences. Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. For its part, Belgium’s home prices could be distorted by soaring prices in Brussels as the European Union’s economic and financial troubles have inevitably increased the business of the EU and prompted an influx of diplomats into a city that functions as Europe’s capital.
These data also underscore the dilemmas central banks face in various countries. Canada’s, for example, is grappling with a slowdown in its economy and a worrying stagnation in consumer prices that’s raising the risk of deflation. But sky-high house valuations make it difficult for the Bank of Canada to cut rates to spur aggregate demand. A similar problem exists in Australia, where the Reserve Bank of Australia would probably love to cut rates in order to drive down what it believes to be an overvalued Aussie dollar but must instead keep a wary eye on home prices.
Meanwhile, the U.K.’s relatively high seventh-position rank underscores concerns that its recent economic revival has been overly driven by government incentives to encourage mortgage borrowing and that such policies have meant that the housing market prematurely recovered from its 2007-2008 collapse before it had flush out its excesses.
By contrast, Germany’s and Japan’s sluggishness speak to the fact that consumers in those societies are still incentivized to prefer savings over spending.
In fact, it’s possible to read Deutsche Bank’s rankings as a snapshot of the world’s economic imbalances.
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