*Just one global housing market has recovered

According to data compiled by the Economist, only one national housing market has recovered to “fair value” after the real estate boom of the late nineties and early noughties.

Disregarding the housing markets in Germany and Japan, which did not witness a property boom in this period, the US is now the only global market (which the publication analyses) where prices are below the long run price to rental income ratio.

According to data compiled using the Case Shiller national index, prices are now 11.5% below “fair value” which compares to overvaluations of 48.5% in France, 39.2% in Spain and 27.8% in the UK.

Although there is some debate over the Economists measure of “fair value” (house prices are more a function of affordability and therefore real incomes and interest rates rather than rental incomes) the conclusion is probably a sound one. The US housing market is in better position than most Western markets.

At the turn of the year, we tipped the US market as one of the best markets for investors and agents. The news since then has been far from positive with prices continuing to decline in most regions (although sales volumes have picked up in many states such as Florida)

The best property market in the world?

Although the social consequences have been awful, in pure economic terms, the US property market is arguably one of the best functioning real estate markets in the world.

The US fell earlier and more rapidly than almost every other national market. A big reason for this is the US system of non-recourse loans. Home owners in negative equity can walk away from their debts and developers and lenders have no recourse to reclaim the debt. The result has been a flood of supply and sharp price corrections.

Almost every Western economy is going through a process of painful debt reduction. There are only four ways out:

Save more (austerity at both a personal and government level)
Earn more (increase real incomes and/or economic growth)
Inflation
Debt default

Through a process of mortgage debt default, the US has put itself in a strong position to recover strongly from the credit-bubble-inducued recession (although it still has severe sovereign debt issues).

As Robert Shiller points out, US house prices may decline another 10-25% so the crisis is not over but its long term position is much healthier than most European markets.

The UK and Spain for example face a long period of “deleveraging” which means either high inflation, austerity or a sharp rise in repossessions. Without a mix of all three for a sustained time period, there can be no return to a “normal” market and that means no short-term bounce back in the lifestyle market of overseas property.

Source: The Economist

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