Australia moves up to fourth most overvalued housing market but bubble risk subsides

Australia has moved from fifth to fourth most overvalued global property market but the overall risk of a housing bubble has subsided, according to the internationally authoritative, but debatable latest The Economist magazine global housing index.

The latest index records only modest gains of 2.6% in Australian house prices over the past year to March (using ABS data), ranking the country 10^th best performing global housing markets out of 18 over 2012 with the top performing market being Hong Kong (24.5%) followed by Brazil (12.8%), South Africa (11.1%) and India (10.7%).

Last year, the index had house prices in Australia down 4.8% ranking it 18^th best housing market out of 21 global housing markets rated by the magazine.

The magazine warns that housing markets are “notoriously prone to boom and bust” and uses “two yardsticks” to judge whether house prices are at sustainable levels.

“One is the ratio of prices to disposable income per person, a measure of affordability.

“The other is the price-to-rent ratio, which is analogous to the price-to-earnings ratio used for equities, with rents going to landlords (or saved by homeowners) equivalent to corporate profits.

“If these gauges are higher than their historical averages, property is overvalued; if they are lower, it is undervalued.”

The Economist calculates that Australian house prices are overvalued 24 times against average personal disposable income and 44 times against rents.

Last year the economist said Australian house prices were 28 times overvalued against personal disposable income and 38 times against rents.

On the personal income housing affordability measure, Australia ranks fourth behind France (34), the Netherlands (33) and Canada (32) while on a rents measure, Australia ranks third behind Hong Kong (81) and Singapore (57).

The Economist’s index from last year (pictured below) had Australian housing ranked fifth most expensive on the personal income measure and seventh on the rents measure.

Using these two measures, it warns that Canada’s housing market is “especially vulnerable” with a “large bubble now looks set to burst” with residential sales down 15% year-on-year and a steeply declining appetite among Canadians to buy a home in the next two years.

In Australia, surveys regularly report a strong appetite and desire for property, though the first-home buyer market remains subdued.

Looking at the performance of housing markets since the GFC (the fourth quarter of 2007) suggests that Australian house prices have risen relatively modestly  (up 12.2%) compared rampant – and perhaps unsustainable – markets like Hong Kong, where they have more than doubled (109.4%) and India (88.8%), where they are close to doubling in value.

Australia’s housing market performance since the GFC is also well below that of Singapore (24.8%), China (20.4%) and Canada (18.3%).

In comparison, the house price bubble has truly burst in Ireland with house prices on the Emerald Isle down 50% since the GFC followed by Spain (-26.5%), the US (-20.8%)

The Economist writes of a “patchy” recovery in global housing markets over the past year with house prices rising in 12 out of 18 markets.

It notes generally strong property markets in South Africa as well as two of the big emerging economies, Brazil and India.

This article first appeared on Property Observer.