IMF's most overvalued housing markets around the world

Era of Benign Neglect of House Price Booms is Over

Theory asserts that house prices, rents, and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in alignment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them––that is, from their income. The ratios of house prices to rents and incomes are thus often used as an initial check on whether house prices are out of line with economic fundamentals. 

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

IMF have posted several graphs. (Yes, they let a graphic artist go a bit wild with them…)

According to the blog, Belgium is an exception to being in trouble, despite the higher than average price to income and rent. That leaves Canada as the most troubled country on both measures with New Zealand and Australia not far behind. Also flirting with a worrisome bubble are France, UK, Sweden, Norway.

IMF have also launched a new site to pull together all their data on world housing markets.

IMF's New Global House Price Watch

OECD and Deutsche Bank Rank the Most Overvalued Countries

The Most Overpriced Housing Markets In The Developed World
Country - Over valued by:
Italy - 10%
Denmark - 17%
Finland - 22%
Sweden - 25%
Spain - 33%
UK - 34%
Netherlands - 36%
Australia - 39%
France - 42%
New Zealand - 44%
Norway - 48%
Canada - 54%
Belgium - 56%

I don't actually agree with this analysis that the U.S. is 9% undervalued. I would have put it at 7-8% overvalued. But given the wide differences between markets, it probably comes down to the weightings. For example, because Las Vegas and Arizona overbuilt without regard to lower population, many of those houses simply shouldn't count in the analysis. Also, if they are using average incomes, that completely ignores that most of the gains in the last decade went to the top few percent and isn't available to the middle class at large to invest. But this isn't about places finding a bottom. It's about those that are doing an excellent impression of Wile E Coyote.

Sweden, Bubble Arguments Are the Same Everywhere You Go

The actual amortization periods for new Swedish home loans is now about 100 years for houses and nearly 200 years for tenant-owner apartments.

I just had to lead with that. You inherit your house outright from your great-grandparents, I guess. No great wonder the Swedes build to last.

The real bubble trouble is actually not the absolute household debt levels (Sweden is still below Denmark, thank you) but the recent sharp growth.

Swedish housing 'bubble' about to burst: agency

"Based on the fundamentals - such as income development and other factors - house prices are at unsustainable levels. We estimate that prices are around 20 percent above what they should be," Bengt Hansson said.

20%? Pikers.

You can read the whole thing. You could make a mad lib out of the article's key arguments and substitute any other bubble country.

Why did I look at Sweden today? Interesting story about that. I was looking at a list of countries' reserve requirements. The four countries without a reserve requirement: Australia, Canada, New Zealand, and Sweden. Coincidence?

Next up, the countries with a mere 2% reserve requirement. Hm, I wonder what's happening in South Africa . . . ?

Holy housing bubbles . . .

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