The global housing bubble is now more overvalued than in 2006, according to the US Federal Reserve
Global real estate prices are reaching a level of overvaluation not seen in three decades. US Federal Reserve Data from the Bank of Dallas (the Fed) shows that the ratio of house prices to income has increased considerably over the past year. The ratio, a fundamental valuation indicator, shows that global property prices relative to incomes have now passed the peak of the global bubble of 2006. Markets now face the most extreme gap since the start from the 90s.
House price-income ratio
The property price to income ratio is a fundamental indicator of property prices. It’s as simple as it sounds, it’s the relationship between house prices and disposable income. By itself, this doesn’t mean much, but over time it displays the historical context of both. A rising ratio shows that house prices are rising faster than incomes, usually due to excess credit. Falling ratios mean incomes are doing better than house prices, sometimes due to a housing correction purging inefficiencies.
Since it would not make sense to directly compare different countries with different measures like interest rates, the values are indexed. Fed researchers index the ratio of 25 advanced economies and create a dynamically weighted basket, similar to inflation. By measuring global ratios, we can see if this is a global or local phenomenon. Global phenomena are called synchronized events and tend to carry more risk than one or two markets going too far.
Global house prices jumped more than 10% faster than incomes in 2021
The index of world house prices in 25 advanced economies shows that incomes are not keeping up. The index posted an annual growth of 10.2% in the fourth quarter of 2021, implying that house prices have risen much faster globally. When house prices in countries like Canada and the United States are rising at more than 3 times the rate of income, it’s easy to understand this statistic.
The gap between house prices and incomes is accelerating in growth
Looking for a data point to understand how fast the past year has gone? Just look down. After the Global Financial Crisis (GFC) caused global housing markets to tumble, the index bottomed out in Q2 2012, with Q4 2021 up 19.6%. In other words, the nearly decade-long cycle has seen house prices rise faster than incomes. During this period, more than half of the disconnection occurred with the most recent year of data. That’s a big increase, and it brings more global instability.
Global house prices are now more overvalued than in 2006
The global house price-to-income ratio, a fundamental valuation measure showing house price growth, has recently significantly outpaced income.
Source: US Federal Reserve (Bank of Dallas); Live better.
The global gap between house prices and income is wider than in 2006
The fundamental indicator finally saw overvaluations overtake the global housing bubble of 2006. Global house prices last peaked on the house price-to-income ratio in the fourth quarter of 2006, after climbing 1.4 % in Q4 2021. There are two takeaways from this data point.
First, the previous quarter was 0.7% below the peak, so house prices exploded just beyond that level. The global house price boom is real. The same goes for the stagnation of global incomes.
Second, global housing markets have not been this overvalued since 1992, the previous global housing bubble. Virtually a whole generation has not seen its income fall so rapidly relative to housing costs.
Last month, the Bank for International Settlements (BIS) concluded that the surge in property prices was due to synchronized easy credit. Recognizing that some price movement is due to higher interest rates, they found that the majority of gains are due to easy credit. Mistakes in monetary policy around the world created a bubble accompanied by a multi-decade spike in inflation.