The subject of house prices is one that I confront every week in relation to mortgage planning.

There are so many variables to consider when choosing a mortgage. Mostly its interest rates and where they are headed, so that an informed decision can be made as to the type of mortgage.

But, in many situations, the direction of house prices over a certain period of time is a major factor.

Problem is that I can’t find my crystal ball. I had it last week but I don’t know where it’s gone!

Who was it that said an economist is a person who comes on TV this week to explain why the predictions he or she made last week were not correct?

To step back for a minute and try to get a handle on the future of house prices requires a solid understanding of the economy. You can go to school for four to six years to learn this, but as we have seen with the recent housing / mortgage debacle, particularly in the United States and in many (most) other countries, the best minds got it wrong.

(We didn’t foresee that…. We didn’t expect…. No one could have foreseen that….. Etc.)

For me to comment seems trite at best, so I look to “trusted” sources for my information and always add a liberal amount of salt.

The Economist is one of my favourite sources, particularly because everything they do is done “on the ground” with correspondents in every corner of the globe.

Their recent take on house prices over the past year is interesting. As always, they take a global view considering twenty-one countries in a recent article.

Here’s a quick summary then, with some extra comments (analysis?) by me:
  • Of the 21 markets covered, 17 show an increase
  • Asia’s prices show the most growth with Singapore, Hong Kong and Australia on top
  • Canada is roughly in the middle of the group
  • Ireland is at the bottom

Here are a few of the numbers for comparison purposes indicating the % change over the last 12 months, over the last 13 years, and the under/overvalued amounts today:

Country Change 1997 – 2010 Under/Overvalued*
Singapore 23.1 18 19.2
Hong Kong 20.6 -6 58.1
Australia 18.4 220 63.2
China 9.1 n/a 18.1
Sweden 8.9 173 41.5
Canada 4.5 70 23.9
Switzerland 4.5 33 -6.4
Japan -4.0 -37 -34.6
United States** ~2.8 ~70 ~12
England 3.0 181 32
Ireland -17.0 129 13.2
What do these numbers say about the value of Canadian houses?

Bearing in mind that prices have come down somewhat of late, the figures suggest that our market is overvalued by 23.9%. They also show an increase of 4.5% over the last year, and an overall gain of 70% from 1997 to 2010.

So, how should this information affect your buying or selling decision? Crystal ball please…. This brings us back to a discussion of the numerous variables at play here.

The classic answer for awhile now has been that yes, the market may be overvalued and prices may come down (they are, a little), but interest rates may go up, so you should not hold off on buying.

However, while there seems to be agreement in general that interest rates will rise over the long-term, the Bank of Canada recently stated that we can expect them to remain flat for the next 12 months. Based on this, I would suspect that house prices should, in turn, remain stable over that period.

Not included in the chart above is the familiar split between the core countries and peripheral ones of Europe, with Ireland, Spain and Italy continuing to show declines, while Germany and France show strong gains in value over the past year, and England is still overvalued.

One can argue with a good degree of confidence, that contradictory figures from the various reporting agencies notwithstanding, the United States is more or less fairly valued right now. This is the prevailing view from my U.S. contacts.

However, I would be very wary of purchasing in the U.S. without a considerable degree of due diligence as to the possibilities for the future.

Finally, look at the figures for Switzerland. Modest growth with a slight undervaluation. How is it that the Swiss seem to get it right so often?

* Valuation determined by a comparison of the current ratio of house prices to rents against its long-run average.

** You can argue the case for the US either way because of the way the figures are reported.

One index, that of the Federal Housing Finance Agency (FHFA), the regulator and conservator of Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks, excludes houses financed with large mortgages; while the Standard & Poor’s, Case-Shiller index reports on a variety of markets within the country including, composite, 10-city, 20-city, and individual metro areas.

Put all of these together and the figures are close to those in the chart which I averaged from three different reports. Or, you can pick an index to support a particular view. (Showing that once again, you can prove anything with statistics!)

(Copyright Dara Fahy. All rights reserved.)