Which country has the most overvalued real estate in the world?

The most overvalued residential property in the world is in Norway, a new study reveals.

Australian home prices have risen the next highest since 1970, according to the Bank for International Settlements (BIS) Quarterly Review, with Asian prices rising the highest in the last year.

The UK, Sweden and France make up the rest of the top five highest valued markets, according to the newly-published BIS study.

But rising real estate prices in overvalued markets increase the risk of future declines, especially where wages are not growing strongly, the report warns.

“This might lead to a reversal or moderation of recent growth or a further sliding of prices. This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate.”

Norway has a reading of around 220 and Australia 200, indicating that the difference between home prices and disposable income are up to 120% higher when compared to the historical average of 100.

Out of the 14 advanced economies examined by the BIS, only the UK has house prices that come close to matching them for inflation adjusted growth over that period.

The study says current price growth was highest in the Asia and the United States with the European markets performing worst.

“Year-on-year residential property prices, deflated by CPI, rose by 9.5% in the United States and 6% in the United Kingdom. Real house prices also grew by 7% in Canada, 7.7% in Australia and 2.2% in Switzerland, three countries that were less affected by the crisis, as well as in some countries that were severely affected by the crisis, such as Ireland (+7.2%) and Iceland (+6.4%).

“Real price growth remained in negative territory in Japan (–2.6%) and was generally weak or negative in continental Europe. Prices rose in Germany (+1.2%) and the Nordic countries (+1.7% in Denmark and +4.8% in Sweden), but continued to fall in the euro area’s southern periphery (Italy, -5%; Spain, -3.8%; Portugal, -1.2%; and Greece, -6%). House prices generally grew in emerging regions outside Europe.”

In Asia, year-on-year growth rates remained high in a number of countries in the first quarter of 2014. “Prices increased in real terms in China (+13%), the Philippines (+13%) and Malaysia (+5%).”

In Latin American countries, the increase in real residential property prices was more moderate. “Prices in Brazil increased by 3.9% in the first quarter of 2014, whereas in Mexico real prices were mostly stable compared with one year ago.

“Price developments were mostly negative among central and eastern European countries, but prices in the Baltic countries rebounded sharply.”

“While for most countries the current ratio implies that price movements are not diverging from rental values in ways that imply unsustainability, for a number of other countries current property prices are much higher than those implied by the historical relationship to rents. A priori, this could be a reason to expect a price correction in the future. Interestingly, some of these countries have experienced only moderate price growth recently (eg Canada, Norway and Sweden), or even price declines (eg Australia, Belgium and France).”

BIS collects data on house prices for 55 countries. For 18 of these countries, series are available that go back as far as the 1970s.

Source: Adrian Bishop, Editor, OPP Connect

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