Inquiring minds are wondering where the biggest housing bubble is.

In what should be no surprise, the Economist rates Australia #1, followed by Hong Kong, Spain, Sweden, France, and Great Britain. Supposedly, US home prices are undervalued and Japan (having gone through decades of deflation), the most undervalued.

The Economist made its determination on the basis of price-to-rent.

Please consider Housing Froth and Stagnation.

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.

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.

Addendum:

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…

Best,

Mike in Tokyo

Mike “Mish” Shedlock
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