AN UNDERVALUED MARKET:

More broadly, a recent analysis by The Economist pointed out that U.S. single family residential is a relative bargain on a global basis. Using the relationship of home prices-to-per capita disposable income and home prices-to-rental cost ratios relative to long-term historical averages, The Economist has developed an estimate of how overvalued or undervalued various housing markets around the world are. The U.S. ranks quite undervalued on both counts; albeit, not quite as undervalued as the German and Japanese housing markets. Not surprisingly, the two developed economies that have been perhaps most reliant upon the commodities supercycle, Australia and Canada, have the most overvalued housing markets. In fact, on the home price-to-rental cost measure, Canada has the dubious distinction as the second most overvalued housing market in the world, trailing only Hong Kong. The next 3 most overvalued on a price torent basis are Singapore, Australia, and France. Using the separate Economist price-to-disposable income ratio, the U.S. housing market looks even more undervalued, whereas Canada, Australia and France remain on the most overvalued list.
This analysis provides more evidence that while the U.S. housing market is improving, it is one of the last asset classes in America to respond to the Fed’s reflation efforts. And with median home prices in America still 29% below peak, the single family housing market looks like it has some further upside, especially compared to some other residential markets across the globe.