The 12 Most Overpriced Housing Markets In The World

Gregory White

2010-11-01T16:51:00Z

The U.S. housing market may have crashed, but bubbles around the world keep blowing.

Prices in some of the world's major real estate markets continue to be inflated by real reasons, like scarcity, and by less savory realities, like easy credit and speculation.

The Economist has broken down which markets are most over-inflated, by comparing rental prices to sale prices of properties.

This reflects what the cash flow is on a potential investment property versus the underlying asset value. If you don't get much cash out of the rental, the property purchase makes less and less sense.

Beyond the rent to price ratio, we've included some detail on each market than may explain why it's due for a correction, continued growth, or is a bubble ready to pop.

#12 Singapore

Overvalued by: 19.2%

Year-over-year increase: 23.1%

Percent change, 1997-2010: 18%

Is it a bubble? Singapore's government is attempting to cool the housing market through limits on builder loans, but it has yet to work and new record sales were made last month. But Singapore is a small place with limited space for construction, and rising amounts of foreign workers. So prices may be increasing too fast, but a bubble seems unlikely.

Source: The Economist

#11 Denmark

Overvalued by: 19.4%

Year-over-year increase: 3.4%

Percent change, 1997-2010: 98%

Is it a bubble? Prices in Copenhagen have already collapsed in the wake of the world financial crisis, so that bubble is through.

Source: The Economist

#10 New Zealand

Overvalued by: 20.2%

Year-over-year increase: 3.4%

Percent change, 1997-2010: 108%

Is it a bubble? New Zealand already experienced a housing bubble, in conjunction with the U.S. in 2007. It has seen significant declines since.

Source: The Economist

#9 Belgium

Overvalued by: 21.6%

Year-over-year increase: 6.5%

Percent change, 1997-2010: 157%

Is it a bubble? Market has already undergone a correction and is now moving higher.

Source: The Economist

#8 Netherlands

Overvalued by: 23.6%

Year-over-year increase: 4.2%

Percent change, 1997-2010: 92%

Is it a bubble? Netherlands has the potential for a 30% decline in real estate prices if it is in a bubble scenario. The market is now unaffordable for many Dutch, and unemployment is rising, so it may be due for a correction.

Source: The Economist

#7 Canada

Overvalued by: 23.9%

Year-over-year increase: 4.5%

Percent change, 1997-2010: 70%

Is it a bubble? From a macro view, Canada is in a real estate bubble because it is experiencing rapid housing market valuation growth due to mis-allocation of capital. But, the country has a currency that is strong, backed by rising commodity prices, and industry in commodities that is growing.

So this may be a bubble, but as long as commodity price inflation remains, it is likely to continue.

Source: The Economist

#6 Britain

Overvalued by: 32%

Year-over-year increase: 3.0%

Percent change, 1997-2010: 181%

Is it a bubble? Property prices in the UK are in a long-term uptrend since the collapse in the 1990s. There was a post-bubble correction, but key locations, like London and the South East, still appear strong.

The big story is the potential for a decline in those high end properties' values. This is not so much a bubble, as a cyclical real estate story.

Source: The Economist

#5 Sweden

Overvalued by: 41.5%

Year-over-year increase: 8.9%

Percent change, 1997-2010: 173%

Is it a bubble? Prices declined during the financial crisis' aftermath, but they've bounced back up. Growth is indicative of the strength in the economy and currency, but could be in line for a correction, similar to Denmark.

Source: The Economist

#4 France

Overvalued by: 42.5%

Year-over-year increase: 6.0%

Percent change, 1997-2010: 141%

Is it a bubble? Potentially, France has seen a serious run-up in prices in the last year, most notably around Paris. So their may be a Parisian bubble in need of a correction, but it may just be a slowing down of property value growth.

Source: The Economist

#3 Spain

Overvalued by: 47.6%

Year-over-year increase: -3.4%

Percent change, 1997-2010: 157%

Is it a bubble? Definitely, but the Spanish real estate market's collapse has been moderated through government action to prop up the banks. It has allowed them to hold property loans for longer, preventing steep price declines in the short term. But it may just be prolonging the inevitable, and result in a dramatic drop, eventually.

Source: The Economist

#2 Hong Kong

Overvalued by: 58.1%

Year-over-year increase: 20.6%

Percent change, 1997-2010: -6%

Is it a bubble? The government in Hong Kong is doing what it can to limit speculation on the city's properties, but there are some encouraging fundamentals. Hong Kong's somewhat separate position vis-a-vis China is appealing to foreigners, as is the limited amount of space.

It is likely the Chinese government will continue to attempt to moderate the situation, but so long as the "China Story" fundamentals are there, it is unlikely to pop.

Source: The Economist

#1 Australia

Overvalued by: 63.2%

Year-over-year increase: 18.4%

Percent change, 1997-2010: 220%

Is it a bubble? Australia's housing price growth is based on some strong fundamentals, like a commodity backed economy, strong currency, low unemployment, and solid economic growth. But it is linked to the broader Asian economy, via the commodities trade, and the strength of property prices may come under threat of the broader Asian growth story collapses.

A small correction may be due, but a bubble pop would take a lot more first.

Source: The Economist