Global real estate prices are reaching a level of overvaluation not seen in three decades. US Federal Reserve Bank of Dallas (the Fed) data shows the house price to income ratio pushed significantly higher last year. The ratio, a fundamental valuation indicator, shows that global house prices to incomes have now blown past the peak during the 2006 global bubble. Markets are now facing the most extreme gap since the early 90s.
House Price-To-Income Ratio
The house price-to-income ratio is a fundamental indicator for home prices. It’s as straightforward as it sounds, it’s the ratio of house prices to disposable income. By itself, it doesn’t mean much, but over time it displays the historical context of the two. A rising ratio shows home prices are growing faster than incomes, usually due to excess credit. Falling ratios mean incomes are doing better than home prices, sometimes due to a housing correction purging inefficiencies.
Since it wouldn’t make sense to compare various countries with different metrics like interest rates directly, the values are indexed. The 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 whether it’s a global or local phenomenon. Global phenomena are called synchronized events and tend to result in more risk than one or two markets going overboard.
Global Home Prices Jumped Over 10% Faster Than Incomes In 2021
The index of global home prices across 25 advanced economies shows incomes are failing to keep up. The index showed 10.2% annual growth in Q4 2021, implying home prices grew that much faster on a global scale. When home prices in countries like Canada and the US are rising at over 3x the pace of incomes, it’s easy to understand this stat.
Gap Between Home Prices and Incomes Is Accelerating In Growth
Looking for a data point to understand how fast the past year’s been? One just needs to look to the low. After the Global Financial Crisis (GFC) tanked global housing markets, the index bottomed in Q2 2012, with Q4 2021 coming in 19.6% higher. In other words, the nearly decade-long cycle has seen home prices rise faster than incomes. Over that period, more than half the disconnect occurred with the most recent year of data. That’s a sharp increase, and that brings more global instability.
Global Home Prices Are Now More Overvalued Than In 2006
The global house price-to-income ratio, a fundamental measure of valuation showing home price growth has significantly outpaced incomes recently.
Source: US Federal Reserve (Bank of Dallas); Better Dwelling.
Global Gap Between Home Prices and Income Is Bigger Than 2006
The fundamental indicator finally saw overvaluations rise above the 2006 global housing bubble. Global real estate prices last peaked on the home price to income ratio in Q4 2006, having since climbed 1.4% higher in Q4 2021. There are two noteworthy takeaways from that data point.
First, the previous quarter was 0.7% lower than the peak, so home prices blew right past that level. The global home price boom is real. So is the global income stagnation.
Second, global real estate markets haven’t been this overpriced since 1992, the previous global housing bubble. Virtually a whole generation hasn’t seen their incomes fall behind shelter costs this fast.
Last month, the Bank of International Settlements (BIS) concluded the house price boom was due to synchronized easy credit. Acknowledging some price movements are due to higher interest rates, they found the majority of gains are due to easy credit. Monetary policy mistakes around the world created a bubble accompanied by a multi-decade high for inflation.