According to measures used by The Economist, U.S. housing prices are UNDER-valued.
First, since American homes now look cheap, are prices set to rebound? Average house prices are 8% undervalued relative to rents, and 22% undervalued relative to income (see chart). Prices may have reached a floor, but this is no guarantee of an imminent bounce. In Britain and Sweden in the mid-1990s, prices undershot fair value by around 35%. Prices in Britain did not really start to rise for almost four years after they bottomed.
Canadian Home Prices
I am now worried about my Canadian friends, however, since the table shows Canadian housing to be very over-valued.
On the other hand, a huge difference between Americans and Canadians is that Canadians pay off their mortgages (because mortgage interest is not tax deductible in Canada and, I believe, the average Canadian is more financially conservative than the average American).
So even if prices started to fall in Canada, it probably wouldn’t trigger the same vicious downward cycle it did in the United States because lower prices in Canada wouldn’t lead to nearly as many foreclosures. Foreclosures are, of course, the main culprit causing the large price declines in the United States.
Nevertheless, I think the take-away from that graphic for my Canadian friends is that the odds of Canadian housing appreciating is probably slim for the next several years and that depreciation is a possibility. Perhaps a more likely scenario, and certainly a more benign scenario, is flat Canadian housing prices for several years.
This is Hard to Imagine
Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble.
Short British Housing
The average deposit needed by a British first-time buyer is now equivalent to 90% of average annual earnings, according to Capital Economics, a consultancy. It was less than 20% in the late 1990s.
Wow! Can I short British housing prices?
Heck, can I short French, Spanish, Dutch and British housing prices?