Undervalued or overvalued: measuring affordability across national housing markets

With the global economy displaying green shoots, buyers – both in mainstream housing markets and second home hotspots – are looking closely at which markets offer real value. Knight Frank’s Global Opportunities report looks at which mainstream housing markets, according to OECD data, are overvalued and which are undervalued. 

Already in 2014 there has been a steady stream of positive indicators for global housing markets. Lending criteria is being relaxed, interest rates in Europe, the US and the UK look set to remain at historical lows at least until 2015, employment is picking up and buyer confidence is strengthening.

This upturn in the global economy, albeit gradual, has meant that for some home-ownership is back on the agenda for the first time since 2008.

Using the latest available OECD data, the Global Opportunities report assesses how house prices are performing compared with rents and incomes, allowing us to gauge which housing markets are overvalued or undervalued. Figure 1 below highlights the key results.


The axis at 0% represents a position where a market is valued in line with its long-term average. A column above the line shows there is an imbalance with house prices surging ahead of rents or incomes. A column close to the line suggests the market is balanced, and displaying a sustainable level of growth.  A column below the line signals the market is overvalued with rental and/or income growth outpacing house prices.

Norway, Canada and Belgium, where prices are still rising (see direction of arrow), represent those countries most at risk of a price correction, particularly if mortgage rates increase or incomes start to slide. The price declines evident in much of Europe, the UK and the US post 2008 largely passed these countries by.

Countries such as Greece, Spain, and Portugal where prices are still falling are likely to end up on the right of the chart as the gaps between the respective indicators narrow.

Germany and Japan, having missed out on the double-digit price growth observed in many developed economies in the early 2000’s remain firmly in the ‘undervalued’ camp.

Mainstream prices in France and the Netherlands, while positioned in the ‘over-valued’ camp, are seeing the rate of decline slow suggesting they are further ahead in the property cycle than those to the left.

While comparisons such as those in the chart above offer valuable insight, it’s important to note that they are based on national average income levels and national house prices which mask different city level dynamics. In cities or local markets with a large amount of global and second home purchasers the ratio outcomes would be significantly different due to higher incomes and rents.

For the full analysis read The Global Opportunities Report 2014.

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