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How to spot over and undervalued global real estate

Posted on 16 July 2013 with 2 comments from readers

One way to value property is to look at the number of years it takes an average person to buy it in that country. The chart below shows just how overvalued Chinese real estate has become on this reckoning.

Such distortions generally occur because of central intervention in an economy. In China the stimulus equivalent to half of national GDP – the biggest in world history – at the time of the global financial crisis is to blame.

Not all homes expensive

In North America house prices in New York do not reflect reality on the ground in say Georgia in the deep south. We just watched a TV program about buying houses and a young couple got a huge dream home for $200,000. That’s cheap and say a maximum of four times earnings.

Dubai prices are higher. But you could still imagine a one-bedroom apartment bought by a young executive being about five times salary. The multiple would be twice that in London.

This is a good guide to whether real estate prices are good value or not. It’s like looking at price-to-earnings for shares. Incomes are crucial to understanding fair house prices.

Interest rates

When houses cost too much then the trigger for a price fall is usually higher interest rates as the rise will quickly impact on affordability. If house prices are cheaper then this does not have such an impact.

Markets like Dubai which are 80 per cent cash and 20 per cent mortgage transactions should also be more immune to interest rate hikes. But globally home loan interest rates are on the way up and that can mean only one thing for the more highly priced markets: house prices will come down.

Posted on 16 July 2013 Categories: Banking & Finance, GCC Real Estate, Global Economics, Private Equity

2 Comments posted by readers:

Comment by Aaronb - 17 July 2013

This is a very interesting way of looking at the value of property. I recall a similar method using gold vs housing ratios which was discussed on http://www.arabianmoney.net

A quick question for the author, what average salary (demographic) did you use for these calculations? I would like to apply the process to my home country South Africa.

Ed Note: You make an estimate for the average income of the kind of family unit or individual that buys an average house and compare it to these house prices. These are not very precise calculations and the cross border analysis is therefore even less accurate but they do show meaningful differences.

Comment by Nida Rizvi - 18 July 2013

What about Singapore and Dubai? Where do they stand in residential affordability?

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