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For many investors, real estate is considered the best place to invest, but in recent years, experts have been keeping a close eye on indicators that indicate that the risk of a bubble in some real estate markets is rising. In addition, they warn that countries such as Canada and New Zealand may be long overdue to adjust house prices.
Economist Niraj Shah released a new study of his own, building a real estate bubble dashboard by tracking four key indicators. The four indicators are the ratio of house price to rent (the ratio of house price to annualized rent), the ratio of house price to income (the ratio of house price to household income), the real house price (inflation-adjusted house price) and the ratio of household credit to GDP (the ratio of household debt to total economic output).
Ranking at the top of one of the indicators alone sends a warning signal to the country’s property market, while being at the top of a number of indicators indicates that the country’s property market is very fragile.
It should be pointed out that most of the indicators here are listed in the form of an index with 2015 as the base year. In other words, these figures do not represent the ratio itself, but how much it has risen or fallen since 2015.
This indicator shows how fast prices are rising relative to the rents paid by renters. If house prices rise much faster than the income of the house (that is, rent), it may not be sustainable in the long run.
Four countries stand out when comparing house prices with rents. The price-to-rent ratio in New Zealand (196.8) and Canada (195.9) has almost doubled since 2015. Sweden (172.8) and Norway (168.2) are not far behind.
In other parts of the world, this ratio is more in line with expectations. In Portugal, for example, house prices have soared in recent years, but rents have risen at almost the same rate.
This indicator shows how fast house prices are rising relative to people’s income levels. If house prices rise too fast, they may become unsustainable because people can no longer afford to live.
At the top of this bubble index are three familiar names: new Zealand (156.8), Canada (155.3) and Sweden (145.7). Where rent growth lags behind house price growth, household income growth also lags behind house price growth.
This indicator shows whether house prices are outpacing inflation-and if so, how much. Rapidly rising prices may be a sign of a bubble.
Real house prices have risen in all 22 markets except Italy (95.5). In terms of this indicator, five countries performed well, with prices rising rapidly: Portugal (131.8), Ireland (127.6), the Netherlands (121.9), Canada (124.1) and New Zealand (121.9). So far, Canada and New Zealand are at the top of all three bubble indicators.
High debt ratios suggest that consumers’ finances are under pressure-and when financial conditions are tight, the likelihood of default increases. If consumer debt is well over 100% of GDP, it could be a sign that such loans are unsustainable. If consumers start defaulting on their mortgages, it could lead to market adjustment or collapse.
Switzerland (128.7 per cent), Australia (120.3 per cent) and Denmark (115.4 per cent) topped the list, with debt far exceeding national GDP levels. However, Canada is once again in the top five with 100.7 per cent, and is the only country in the top five of all bubble indicators.
The results show that global house prices have just returned to their peak levels before the last round of financial turmoil. Canada and New Zealand are the regions with the worst property bubbles, while Australia, Norway, Sweden and the UK are also worrying.
According to a report released by the Canadian real estate website Better Dwelling, house prices in several major Canadian cities have experienced explosive growth since 2000. In the year to March 2019, real estate prices in Toronto rose 239.9 per cent from a year earlier; prices in Montreal rose 189 per cent; and the most exaggerated was Vancouver, where prices soared by 315 per cent.
Policymakers are already taking action. The Canadian government has imposed additional taxes on foreign buyers, while New Zealand has restricted property purchases by overseas investors. The main challenge facing these countries now is whether house prices will continue to rise as the Federal Reserve and other central banks start to cut interest rates.