House prices in the world’s most desirable cities keep climbing further out of reach, with the average price of a home rising by 34% in real terms in the past five years, according to the new cities house-price index launched by The Economist.
The report compares house prices with each city’s median household income to determine if housing is over or undervalued. If prices rise faster in the long run than the earnings needed to service a mortgage then they are considered unsustainable and overvalued.
“In the long run, prices must bear some relation to incomes: people can only increase the share of their earnings they spend on lodging for so long before they run out of money,” the report says.
Among the cities with overpriced housing, Vancouver came out on top (65% overvalued), followed by London (59% overvalued), then Sydney (50% overvalued), and Amsterdam and Copenhagen (both almost 50% overvalued). House prices in Sydney rose by 64% over a ten-year period. In the last five years alone, the city’s house prices went up by 50%.
However, house prices have slowly begun to fall in a few places, such as Auckland, London, Sydney, and Toronto. Cities with fairly valued or undervalued house prices include Tokyo, Milan, Singapore, and New York.
Property prices of the top cities may be nearing a turning point, according to the house-price index. The average house-price inflation rate across the 22 cities has slowed from 6.2% in the past months to 4.7% today.
The Economist suggests three reasons for the slowing trend: people are leaving cities or are no longer flocking to them because prices have put them off; house prices have been aggravated by governments’ failures to expand housing supply in many cities; and lax monetary policy since the GFC making mortgages extremely cheap and super-charging prices.
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