The Economist: Home prices are undervalued in the US and bubbly in Canada
Though recent studies have been much more optimistic about the state of the Canadian housing market, The Economist believes prices for homes, which have increased by 20 per cent since 2008, are “bubbly.”
One of the key measures the magazine uses to judge whether a market is overvalued or undervalued is the the case for investing in property by comparing prices with rents. If the ratio is higher than historical averages since the mid-1970s, the home is overvalued. For the price-to-rent ratio, Canada had the second highest (or second bubbliest) score, following Hong Kong, which saw an astonishing 90.9 per cent rise in values.
The other gauge assesses affordability by comparing prices with disposable income. For that measure, Canada came in second again, this time following France (the data set was not available for Hong Kong).
Just south of the border, the story is far different. The Economist reports that the formerly “stricken” market in the United States has rebounded with a 12.1 per cent price bump in the last year alone. However, that doesn’t mean the growing market is headed for bubble territory since prices remain undervalued when measured against income. Coupled with the recent rise in mortgage rates, the American recovery appears to be sound.
For more stats, check out the table below…