House prices – with respect to both levels and changes – differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen’s Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices – still extremely over-valued (20-30%) – despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: “what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing.”
Using these indicators, OECD countries can be roughly placed into five categories:
Where houses appear broadly correctly valued. This category includes the Unites States, where prices have started rising again after a substantial correction; Italy, where prices are falling rapidly; Austria, where prices are rising; and Iceland, Korea and Luxembourg where prices are roughly flat.
Where houses appear undervalued and prices are still falling. This category includes European countries hit hard by the crisis – Greece, Ireland, Portugal, Slovenia, Slovakia and the Czech Republic – but also Japan.
Where houses appear undervalued but prices are rising. This category includes only Germany and Switzerland, two European countries where strong growth in household disposable income and favourable financing conditions have boosted prices (despite macro-prudential measures in Switzerland).
Where houses appear overvalued but prices are falling. This category is the largest as it includes many European countries where the post-crisis housing market correction is still ongoing, most notably Spain, but also the United Kingdom, Belgium, Denmark, Finland, the Netherlands and one non-European country, Australia. While price corrections in these countries are necessary, they are also concerning as they weaken households’ financial health and potentially fragilize banking sectors.
Where houses appear overvalued but prices are still rising. This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.
Edwards explains reality:
Why are houses too expensive in the UK?
Too much debt. So what is George Osborne’s solution for first time buyers unable to afford housing? Why, arrange for a government guaranteed scheme to burden our young people with even more debt!
Why don’t we call this policy by the name it really is, namely the indentured servitude of our young people.