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Property Bubbles According To The Economist

If you were to just look at year on year rate of change, you can make a guesstimate on the amount of froth in property prices in a particular property market. But its a shallow estimate. Never mind, let's look at the "frothiest markets":
1) Singapore
2) HK
3) Australia
4) South Africa
5) China

Mish correct said that a better measure would be the long run price to rent ratio, which is the last column on the table provided by The Economist. If you are not staying in it and you can't rent it, there is no accrued value, its just speculation. We find empty apartments and houses throughout Asia, but prices are hovering on the high side still. I find one of the weakest argument is the foreign buyers argument, yes if they are buying to stay or rent, but if its empty, its empty demand.

Another hole with the foreign buyers argument is "its so cheap compared to their own markets" - sooooo what???!!! People may have a lot more opportunity to make 5x your salaries, do you? When you talk to property agents nowadays for properties above RM1m, thats their mantra. They conveniently forget that the basis of property is "rental", "cost of capital or interest rate" and "affordability ratio".

I don't need to elaborate on each of the three for you readers, you can make your own conclusions. The affordability ratio used to be 3x-4x your annual salary, now its acceptable to be 5x-6x. What that means is if you make RM120,000 a year, you should be able to afford a RM600,000 property based on 5x. Any higher you would be shitting bricks in a slowdown or if you lose your job. In fact in Australia, Singapore and HK, the affordability ratio jumps to 8x-10x. This basically means that they at least half their net pay into servicing the mortgage. If you argue on that point alone, then Malaysian property has some space to go up ; )

Anyway, back to the long run price to rent ratio, the most overvalued would be:
1) Australia 61%
2) HK 53%
3) Spain 50%
4) Sweden 39%
4) France 39%
6) Britain 33%

In that measure Singapore is not too expensive, which I would agree. You buy a S$1.5m apartment, you should have no problem renting it out for S$4,500 a month fully furnished or a yield of 3.6%. In KL, you may still get that but man, you have to be lucky to get it rented out at that price.

Property prices and bubbles are not as liquid like stocks. They may not fully correct, they may be able to wait for fundamentals and earnings to catch up if they were lucky. Right now in the high end, everybody is buying everybody's property. We see Singaporeans, Chinese mainland citizens, Indonesians and even HKers buying Malaysian property. Malaysians are also big buyers of Singapore property, make no mistake about it. Chinese citizens have been big buyers everywhere. Until something drastic happens to one or two of these economies, there are probably not going to be too many forced selling, just empty houses and apartments.

The Economist: In recent months several countries have experimented with measures to cool bubbly property markets. Yet since The Economist’s global round-up of housing markets was last published in April, house-price inflation has accelerated in some of the very countries where the authorities have intervened to slow its rise.

Asia has been at the forefront of such interventions. In February Singapore’s government raised down-payment requirements and imposed stamp duties on all residential properties sold within a year of purchase in a bid to curb speculation. Despite these steps prices in the island nation rose by nearly 40% in the year to the end of the second quarter, after a rise of just over 25% in the year to the end of the first quarter. Singapore has overtaken Hong Kong to become the frothiest housing market among those we monitor.

House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009. More concerning, however, is our analysis of “fair value” in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track. A frothy property market was one of the reasons for the Reserve Bank of Australia raising interest rates six times between October and May.

Mish's Global Economic Analysis: In judging Singapore the "frothiest" the Economist is looking at rate of change. I would call Australia the "frothiest" based on valuation. Spain surprised me because I had assumed the economic implosion might have washed more of its bubble out.

However, my friend Bran, who lives in Spain and emails me nearly every day says "If all the unsold property were released at prices that would move the units, 50% is not far off, and it could be more than that. Moreover, 50% isn't even harsh at ground level when you have seen prices go much more than double in a few years."

In Canada, the bubbles are where the most people live. The US is misleading because some markets are hugely overvalued while others are approaching reasonable valuations. Florida has without a doubt crashed and in vast sections of sparsely populated Midwest farmland, the bubble never expanded much in the first place. Thus, averaging out the US (or Canada) is not is not the best way of looking at things.


Mike in Toyko writes
Hi Mish,

Love the blog.

We bought a beautiful house in Tokyo in 2005 directly from the original owner. He had paid $3.5 million dollars for the house when it was new during the peak of the so-called bubble economy in 1989. We bought it from him at the fire sale distressed price of $800,000.

Because we bought it directly from the original owner, we didn't have to pay any sales tax and saved 5% right there.

Well, that's been 5 years ago. This is a fairly posh neighborhood and next door, two dinky brand new homes were built a over year ago that were on the market for about $1.6 million dollars... They didn't sell at all. In fact, I never really saw any people coming to look at them at all.

Yes, Tokyo is expensive, but would you pay $1.6 million dollars for a two-bedrrom house that has no yard or garden and the floor- space is about as big as a typical American two-car garage?

Finally, I heard the real estate company and builders just wanted to get rid of these lots as they continually cost money to keep them "new" and they sold the houses for about $700,000 each.

Maybe Tokyo or Japan's housing prices are 30-some percent undervalued, but you wouldn't guess it by the lack of new home construction and the "For Sale" signs that sit in front of these homes for over a year...


Mike in Tokyo


HollyS said…
There are stories of mainland chinese buyers going to property auctions with cash and paying obscene prices of A$3 to $4 million cash. And few come in to snap up 10 properties at one go and leaving them empty for price appreciation. Unfortunately many Australians are themselves bidding up prices and having own a few properties. Yet many do not believe that prices will come down and here lies the danger. Have a friend who bought a landed property for A$110k back in 2002 and its now going for A$700k.

Smart investors are keeping cash and wait for the right time to go in.
clk said…
The Oz mkt in my opinion has gone bonkers. It does not have land constraint issues like S'pore and HK. It's a continent with a population less than M'sia.

It is much cheaper to rent at this moment, with most yields going around 3-4% gross, with net possibly around 2-3% p.a. although it can be difficult getting a place as well (not sure why with low supply, yields remain low).

There is something here landowners are obssesed with called "negative gearing" tax deduction. People seem "happy" to have tax loss deduction on other income based on net loss from rental yield after interest costs. Banks are also happy to lend interest only loans; i.e. no principal repayments. They use this with the "hope" of future capital gains.

Some say its foreign investors from mainland PRC that has landed into Oz. The fact remains, no one actually knows the real reason, but one can speculate many possible reasons.

The obsession with properties here is that as a result of paper gains from the past, owners leverage and buy a second home on loans from the first home and then leverage it further on the third home and so on and so forth.

As nearly everyone has a stake on this domino (Govt, bankers, real estate agents, landlords, contractors etc.) no one dares to change the status quo.

As for empty homes, its all hidden as weekend holiday homes and empty commercial properties on the fringes of major city.

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