E Overheated Housing Markets - Part 3

<< Read Part 1: Overheated Housing Markets

<< Read Part 2: Overheated Housing Markets

The price-to-rent ratio is another popular measure to gauge the condition of housing markets. It compares house prices to rental prices and thus measures the profitability of owning a house. With a higher ratio, renting becomes more attractive and if it rises high enough, some households might switch from owning to renting their homes. If that occurs on a large scale, then the demand for owner-occupied housing would fall - leading to a contraction in the housing market that can have adverse effects on the entire economy.

First two charts show the price-to-rent ratios for the six economies. According to the latest data, the Canadian and Icelandic housing markets are overvalued based on the value of 120 (20%) or higher.

The following charts display the ratios with Q1 2010 as the baseline level. Keep in mind the price-to-rent ratios for Australia and Iceland did not bottom out until Q3 2012 and Q1 2013. We had a double dip in Australia and a lengthy relatively flat ratio in Iceland.

 

Disclosure: The analysis provided here is usually part of the analysis the author uses when he is designing and managing his investment portfolios. 

Disclaimer: The analysis presented ...

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