In many OECD ountries real house prices have moved higher and for longer than in previous cycles. But in two-thirds of countries, including the United States, there is not a significant overvaluation problem, according to the latest OCED Economic Outlook, published yesterday.
In a special chapter on Recent house price developments: the role of fundamentals (PDF), it is argued that although the current housing boom is "unique", in most OECD countries house prices are not that much out of line with fundamentals and relatively few economies are vulnerable.
A number of elements in the current situation are unprecedented: the size and duration of the current real house price increases; the degree to which they have tended to move together across countries; and the extent to which they have disconnected from the business cycle.
While concerns have been expressed in several quarters about high housing prices, the evidence examined here suggests that overvaluation may only apply to a relatively small number of countries. However, the extent to which these prices look to be fairly valued depends in good part on longer-term interest rates, which exert a dominant influence on mortgage interest rates, remaining at or close to their current low levels.
In terms of affordability, "household debt service burdens have generally been relatively stable", as lower mortgage rates offset
rising house prices. The "main exceptions" are Australia, the
Netherlands and New Zealand.
In 2005 price-to-income ratios exceeded their long-term averages by 40% or more in one-third (6 in 18) of the countries studied: the United Kingdom, Ireland, the Netherlands, Spain, Australia and New Zealand.
In Canada, Denmark, France and the United States, the run-up has been more moderate but these values still represent historical peaks.
However, the OECD point out that price-to-income ratios are not a good measure of overvaluation:
The ratio of prices to household disposable income by itself, however, is not a sufficient metric to evaluate housing affordability. Indeed, house prices do not appear to be linked to income by a stable long-run relationship ..possibly because the cost of carrying a mortgage has varied over time.
They then provide an alternative approach which compares the actual price-to-rent ratio with that based on the user cost of housing over the past ten years. This analysis concludes there was overvaluation in australia and five European countries:
In the countries with high real house price gains (the United Kingdom, Ireland the Netherlands and Spain) and in Australia (where very high real prices have more recently been edging down) and in Norway, actual price-to-rent ratios were noticeably above their “fundamental” levels in 2004, suggesting overvaluation.
Overvaluation on this basis is "not large" in France, Canada, Denmark, Sweden or New Zealand, and "absent altogether" in Finland and Italy. House prices 'look undervalued" in Japan, Germany and Switzerland. As for the United States:
In the United States, the “fundamental” price-to-rent ratio was above its actual level until 2000, the benchmark year. Since then, the series have moved together and the gap between them has been negligible. On this measure, there does not appear to be much of a case for overvaluation, at least at the national level.
That said, the chapter also includes a box on regional housing markets in the United States, which shows that some regions - especially California and Florida - suffer from "price overheating".
The OECD also add the important caveat that housing valuation and affordability estimates would look a lot worse if interest rates were to rise significantly:
However, the extent to which these prices look to be fairly valued depends in good part on longer-term interest rates, which exert a dominant influence on mortgage interest rates, remaining at or close to their current low levels.
An important caveat.
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