Bridge over ocean
1 May 2013 CFA Institute Journal Review

Home Truths: Global House Prices (Digest Summary)

  1. Marc L. Ross, CFA

Sharp differences exist between the housing market in the United States and the housing market in Europe.

What’s Inside?

The global snapshot of house prices reveals many diverse situations. The sanguine outlook for the United States contrasts sharply with the outlook for some of the European economies. The author uses two metrics to support his findings and examines some Asian economies as well.

How Is This Article Useful to Practitioners?

Recovery in global housing markets is mixed at best, with many economies still suffering. The author uses two price measures to determine whether houses are expensive or cheap. Both measures compare current estimates with a long-term average, typically dating back to 1975, that proxies for fair value.

The first measure is price-to-rent ratios, which are akin to the price-to-earnings ratios used for equities. This measure divides current prices by rent, which provides income to investors or savings to homeowners. Rent is equivalent to corporate profit. The other measure divides prices by disposable income per person. Both metrics display a wide range of over- to undervaluation. Canada falls into the former category, Japan into the latter. Both measures point to a sustainable revival in U.S. house prices because the correction that happened over the last few years has made houses inexpensive on a historical basis and monetary policy has been loose. Both measures point to undervaluation in the United States.

Homeowners fared less well in Europe. Markets that experienced massive overbuilding have done the worst. Unemployment rates and the availability of easy money are important determinants of value. Peripheral countries have struggled more than the anchor nations of France and Germany, where unemployment is relatively low and the banking systems are robust. Prices in England are close to fair value—a result of readily available mortgage financing and lack of a property glut.

Valuation misalignments may mean-revert, but the rate at which it will happen will vary according to the market. Consider Japan versus Canada: Fragile markets stand to lose the most once the salve of cheap money disappears.

Real estate fund managers and estate agents would consider these findings helpful because they provide a useful tool to aid in valuation decisions.

Abstractor’s Viewpoint

Global residential property markets continue to be challenged. The recent financial crisis has affected the housing markets of weaker economies more than stronger economies. An understanding of the levers of valuation can provide a clearer picture of where things stand but not necessarily how they will play out over the longer term. Such measures need to be integrated into the larger economic context to have clearer meaning and provide useful guidance.

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