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A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’
House prices in the developed and developing world have risen rapidly since the financial crisis.
According to the OECD (Organisation for Economic Cooperation and Development), house prices in its developed member nations have risen 32% from their trough in 2009. In the major emerging markets of China and India, the price of housing has risen at a significantly faster pace – Chinese housing is up 43% and Indian housing up 70% over the same period.
In the UK, house prices have risen by a fifth from their 2009 lows. With wages growing at a slower pace, housing has become more expensive relative to incomes. For homebuyers this effect has been somewhat mitigated by low mortgage rates.
Historically, financial crises have led to sharp declines in asset prices, making housing more affordable. But this time central banks moved to boost asset prices by slashing interest rates and engaging in quantitative easing. This has supported equity, bond and house prices across the world.
As a consequence, in several countries, housing looks overvalued and less affordable, despite low interest rates making mortgages cheaper.
A widely used measure of affordability compares the current ratio of house prices to incomes or rents against their long-term averages. According to the ONS, the median UK house costs £232,500 now, about eight times the median annual earnings. When this ratio is compared against its long-term average, UK housing appears 30% overvalued against incomes, according to the OECD. Similar calculations using rents instead of incomes indicate that UK housing is 38% overvalued against rents.
By contrast, US housing appears to offer much better value. Despite prices having risen 36% from their trough in 2012, US housing remains 6% undervalued against incomes.
Across the 24 developed economies tracked by the OECD, housing is most overvalued in New Zealand, Sweden, Australia and Belgium. In New Zealand and Australia, which have benefited heavily from Chinese growth, housing boomed in the post-financial crisis period. House prices in New Zealand are up 64% from their 2009 lows. Australian house prices, which have seen some recent adjustment as Chinese growth slows, are up 30% over that period.
The most undervalued housing markets in the developed world, relative to incomes, are in South Korea, Japan, Portugal and Greece.
South Korean housing is undervalued by 40% while Japanese housing is 25% undervalued against incomes. But this should not be seen as a buy signal. Japan’s experience suggests caution. Despite 18 years of quantitative easing house prices in Japan are 36% below their 1991 peak. Japanese housing has, on the OECD measure, been undervalued against incomes for the last 18 years.
Portugal is Europe’s most affordable housing market. Portuguese house prices are currently 9% lower, on average, than in 2001. Greek housing is also undervalued on the two OECD measures with prices 44% below their pre-crisis peak.
Surprisingly, the third most affordable European housing market is Germany’s, with housing 5% undervalued against incomes despite recent price rises. But affordability analysis is not an exact science. Major German cities have seen rapid price rises with housing widely believed to be overvalued. A recent report by the IMF estimated housing in Munich to be over 40% overvalued while that in Hannover, Frankfurt and Hamburg overvalued by 25-30%.
This brings up another aspect of housing affordability analyses. Housing valuations tend to focus on national house price indices. But within countries prices vary significantly. National affordability figures therefore conceal big differences within countries.
Within the UK, housing in London and the South East is the priciest, with London overvalued by 64% against first-time buyers’ incomes, according to data from Nationwide. That makes London housing more overvalued than the New Zealand market which is one of the world’s most expensive. By contrast, housing in Scotland, the North East and Yorkshire and the Humber is much more affordable for first-time buyers, with affordability closer to levels in Spain.
In the US, the tech boom has helped drive a more than doubling of house prices in San Francisco since 2012. Over the same period New York prices rose by just 28%.
Housing has benefited heavily from the rising tide of cheap money delivered by central banks after the financial crisis. While this has affected affordability, wide variations remain within and between countries and ultra-low financing costs have somewhat helped ease the pain for homebuyers.
Last summer, with the US Fed continuing rate rises, concerns had risen over how housing markets might respond to a tighter monetary environment. But the current global slowdown and consequent dovish turns by western central banks this year suggest that the cheap money tide has yet to turn.
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