These 4 Metrics Track Rising Bubble Risks In 22 Housing Markets

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…Experts have been closely watching several indicators that point to rising bubble risks in some housing markets…[and,] earlier this week, Bloomberg published results from a new study…[that] tracks four key metrics…Let’s look at each bubble risk indicator, and see how they apply to the 22 countries covered…

Ranking high on just one of the metrics below is a warning sign for a country’s housing market while ranking high on multiple measures signals even greater fragility. The 4 key metrics the study tracks are:

1. House Price-Rent Ratio

When looking at housing prices in comparison to rents, there are four countries that stand out:

1. New Zealand (196.8)
2. and Canada (195.9) have seen ratios of housing prices to rents nearly double since 2015.
3. Meanwhile, Sweden (172.8)
4. and Norway (168.2) are not far behind.

Elsewhere in the world, this ratio is much more in line with expectations. For example, in Portugal—where house prices have skyrocketed over recent years—rents have increased at nearly the same rate, giving the country a 99.2 score.

2. House Price-Income Ratio

There are three familiar names at the top of this bubble indicator:

1. New Zealand (156.8),
2. Canada (155.3),
3. and Sweden (145.7).

In places where rents are lagging housing prices, so are the levels of household income. For how long will people afford to buy increasingly expensive houses, if their incomes continue to lag?

3. Real House Prices

Real house prices have increased in all of the 22 markets, with the exception of Italy (95.5). For this indicator, there are five markets that stand out as having fast-rising prices:

1. Portugal (131.8),
2. Ireland (127.6),
3. Netherlands (121.9),
4. Canada (124.1),
5. and New Zealand (121.9).

The latter two – Canada and New Zealand – have appeared near the top of all three bubble indicators, so far.

4. Credit to Households (% of GDP)

Exceedingly high debt ratios point to a strain on consumer finances – and when finances are strained, the chance of a default increases. The 3 countries that top the list with consumer debt far exceeding GDP levels:

1. Switzerland (128.7%),
2. Australia (120.3%),
3. and Denmark (115.4%).

However, Canada still makes an appearance in the top five with a debt-to-GDP ratio of 100.7%.

(It should be noted that most of the measures here are shown in an index form, using the year 2015 as a base year. In other words, the data is not representative of the ratio itself—but instead, how much the ratio has risen or fallen since 2015.)

Editor’s Note:  The above excerpts from the original article by Jeff Desjardins have been edited ([ ]) and abridged (…) for the sake of clarity and brevity.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.