It’s hardly a trophy to be proud of: Once again the Australian property market is the most over-valued in the World, according to The Economist, with Hong Kong still not too far behind.
In crowded Hong Kong, property is so expensive that even the estate agents are squeezed for space. The number of licensed agents reached 31,306 at the end of last year, an increase of 40% since March 2009. The qualifying exam is so popular that fees are going up. Golden Hill Properties in Wanchai makes do with a storefront but no store. Its agents perch on stools outside, reading from computer screens encased behind glass and typing on keyboards unlocked from a drawer.
But whatever those 31,000 agents say, Hong Kong homes are not a good deal, according to our latest global house-price index (see chart). In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay. Our index calculates the ratio of prices to rents in 20 economies. In Hong Kong, that ratio is now almost 54% above its long-run average—and it is still rising.
People in Hong Kong often blame buyers from mainland China for pushing up prices. Ironically, mainlanders often blame buyers from Hong Kong for their own property frenzy. At a recent conference at Tsinghua University in Beijing, students complained that their parents had scrimped and saved to send them to university in the city, but now upon graduation they could barely afford to live there.
Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%. But this is based on the government’s 70-cities index, which showed prices rising by only 6.4% in the year to December. That figure seemed implausibly low to many of China’s stretched homebuyers, and the Chinese government appears to share their scepticism. Last month it said it would stop publishing the national figures, releasing only the local results instead. These show plenty of variation between cities: prices rose by 6.8% in Beijing in January, for instance, but by 1.5% in Shanghai.
Hong Kong’s price rises are the steepest in our index but it is not the most overvalued housing market. That honour remains with Australia, which is overvalued by about 56%. In third place is France, where the ratio of prices to rents is about 48% above average. That may be one reason why over 40% of residents choose to rent. Tenants are well protected under French law from capricious landlords. Owners, on the other hand, must contend with volatile prices, partly because housing supply is so unresponsive to demand. A 10% increase in prices prompts only a 3.6% increase in supply, according to the OECD, compared with a 20% increase in America.
In Australia the market is at least inching closer to fair value. Home prices in Australia’s eight state capitals rose by only 1.2% in the year to January, according to the RP Data-Rismark index. Compared with the month before, prices fell by 1.6%. (The index shows the latest quarterly data.)
Indeed, only in Hong Kong, Singapore and Switzerland is the property market more overvalued than it was before the global economic downturn began in the third quarter of 2007. In every other market the ratio of prices to rents has fallen over that period. In America, prices may have overshot a little. Using the Case-Shiller index of prices, the market looks undervalued by almost 8%.
In both Japan and Germany the housing market is drifting even further below fair value: homes were already cheap and are growing cheaper. In Germany the ratio of prices to rents has tended to fall since the early 1980s, a trend interrupted, and then briefly, only by unification.
In Japan owning has been getting cheaper relative to renting since 1990, when the country’s infamous property bubble burst with devastating effect. The market is now undervalued by more than a third, our index suggests. Even estate agents seem to be losing heart. According to the Real Estate Transaction Improvement Organisation, their numbers have fallen for the past four fiscal years.