Why has the global property "bust" varied so dramatically?
A recent article in The Economist gave me pause for thought. Unless you´ve just returned from a few years living with the Nukak tribes in the Amazon, you´ll be aware that a huge worldwide property boom came to an abrupt halt between 2007-2008. What is less commented on is how the actual "bust" has been much less widespread than the "boom".
Boom to bust and back again
Let´s have a quick look at what happened in the countries where most of our blog readers reside:
Timber!!
Average prices across the 50 states in the US fell by 34% from peak to trough - a hefty drop indeed, although price levels have been remarkably steady since 2009 (see graph below). Across the Atlantic in Ireland, prices have fallen by an eye watering 45% since 2007 and yet they are still falling by approx 1% every month.
Tumbleweed
In Spain & Britain, prices have fallen by only 10-15%, even though you could argue that their property booms were just as large as Ireland´s and America´s. Bankruptcy laws, lending criteria, planning laws and government intervention have all had a big influence on property prices during the post boom years.
Woah horsey!
In Australia and Canada, property prices wobbled a bit in 2008, but they´ve been on a roll since 2009 and average prices are now 40% higher than 2005 levels. Indeed, they´ve been rising inexorably since 2001.
It´s worth bearing in mind that all of these figures are national averages - they point out very useful macro trends but they hide huge regional differences. Also, buying the right property at the right price has always depended on getting the little details right - i.e. figuring out the best town, neighborhood, community and unit.
Note: Click on the image above if you´d like to play around with the dates and countries.
So what conclusions can we draw from this graph? For a start, the world class number crunchers who supplied the information above have provided us with a very clear indication of whether these property markets are overvalued or not. As a property investor, I would consider that to be extremely useful.
Just as the combination of a high share price and low profitability can point towards an overvalued stock (Groupon anyone?) a low purchase price and a high rental income can point towards an undervalued property. Think about it. Makes sense right?
By these measures, property in Spain, Britain, Canada and Australia looks overvalued. You simply aren´t getting much bang for your buck in these locations. Prices in Ireland would merely be considered "fair". Why? Because property prices were in the stratosphere and both rents and the average income of renters has been falling very sharply.
On the other hand, property in the US would be considered significantly undervalued compared to the historical ratios between house prices and rents. By historical I don´t mean comparing 2005 with 2011 - that was a very volatile period. But if you can do it over 35 years, then you are onto something meaningful.
The Economist has done exactly that. After analyzing all the housing data between 1975 and 2011, they have categorically stated that US property prices are 22% below the average price-to-rent ratio.
In other words, they´re saying that purchase prices should be 22% higher given the amount of money the average renter is earning and is willing to pay. That suggests plenty of room for future capital growth and a healthy rental income in the meantime.
For full details on the real estate offered by Torcana Ltd please visit www.torcana.com