Jean-Charles Bricongne (Deputy Director, Central Bank of France) and Alessandro Turrini (Head of Macroeconomics Surveillance, EU Commission) gauge global house prices using a novel approach in this article. Currently in the literature, house price statistics exclude direct, cross-country comparisons via changes in prices. Bricongne and Turrini’s ability to fill this gap allows for early detection of boom and bust behaviour. They discovered housing affordability can be determined through the price-to-income (PTI) ratio and found that the global median value is around 10. That implies that if buying 100 sqm house requires more than 10 years of income, there is a material risk of a downward correction in house prices going forward. The housing market in the UK (10.2) and the US (3.8), through this measure, seems safe. But markets in Australia (16.3), South Korea (17) and Russia (20.4) are signalling overvaluation.
Why does this matter? In light of the lessons learned from 2008 GFC, the health of the housing sector is a crucial signal of macro-economic stability. While the US, EU, and China are in the headlines as recession risk brews, we must recognise that with the global nature of our modern economy the risk from other countries and its sectors can spill over. This was evident with the spread of 2008 GFC, which stemmed from the US housing market.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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