The collapse of the US housing market bubble emphasizes how important it is to figure out what property is really worth, from a fundamental perspective. Make sure you’re not over-paying!

There are 4 yardsticks to avoid buying in bubble markets:

•Price to Rent Ratio (or Yield)
•Relative Prices
•Affordability
•Price of new builds


VALUATION TOOL 1: THE PRICE TO RENT RATIO

The gross rental yield) is the housing parallel to the price/earnings ratio. Here is a set of rules of thumb for the housing market:

VALUATION YARDSTICKS FOR THE HOUSING MARKET

PRICE/RENT RATIO GROSS RENTAL YIELD (%)
5 20 Very undervalued
6.7 15 Very undervalued
8.3 12 Undervalued
10 10 Undervalued
12.5 8 Borderline undervalued
14.2 7 Fairly priced
16.7 6 Fairly priced
20 5 Borderline overvalued
25 4 Overvalued
33.3 3 Overvalued
40 2.5 Very overvalued
50 2 Very overvalued

But there are exceptions to this. When strong future growth in value is expected e.g in areas where transport infrastructure is being upgraded then relatively weak present earnings can be acceptable.

There are several good reasons why people should pay attention to the 'valuation parameters':

Higher rental yields push the housing market higher

If rental yield levels are high, this will tend to mean that the interest cost of buying a house is low, compared to the cost of renting a house:

•Potential buyers will pay less to borrow from the bank (in order to buy) than they pay when renting a house. Many will move from being renters to buyers.
•Entrepreneurs will find it makes sense to buy houses to make money, i.e., buy in order to rent them out.

Both these factors put upward pressure on house prices.

Lower rental yields put downward pressure house prices

If rental yield levels are low, this will tend to mean that the interest cost of buying a house is high, compared to the cost of renting a house:

•Potential buyers will find that to buy a house involves paying much more to the bank, than it costs to rent a house. Buyers, especially first-time buyers, may have difficulty financing housing. Banks will be worried about over-lending at loan-to-income ratios which mean that a slight increase in interest rates will mean financial crisis for the borrower.
•Entrepreneurs will find that buying-to-let won't pay.

The house price can be viewed as a kind of circle, with houses prices moving from yields of (say) 4% to 11%

•Yields shifting down to 4% would represent danger.
•Yields rising to 11% would signal opportunity.


VALUATION TOOL 2: RELATIVE PRICES

People tend to actively look for cheaper and better alternatives. Where houses are very highly priced, people will seek more affordable alternatives. So if you’re buying property that’s amazingly expensive on a sqaure foot basis compared to its surrounding developments – BEWARE!


VALUATION TOOL 3: AFFORDABILITY

If house prices are so high that few people can actually afford to buy them, then their value will likely fall in future. A reasonable measure of value is a country’s GDP per capita. In a country where the ratio of house prices to GDP/capita is high, it’s a fair bet that houses are overvalued.

Relative to GDP/Capita levels:
•House prices in Luxembourg, Belgium, Norway, Denmark and Austria seem cheap.
•House prices in the UK, Italy, France and the Netherlands seem comparatively expensive.


VALUATION TOOL 4: PRICE OF NEW BUILDS

If house prices are much higher than the cost of building (construction costs), developers are motivated to put up buildings. So when you see a rush by developers to build, that’s a danger sign. As new supply comes into the housing market, that tends to put pressure on prices. So when house prices are far greater than new-build costs, it's a very clear signal that prices are likely to come down.

U don't need any numbers for specific countries. This is a general article written for all markets in general. The 4 signs are very real.

I think the bubble is already here. Its just a matter of when and how bad the burst is gonna be. Some areas may experience major drops in prices while others may only experience stagnation.

20 Very undervalued
15 Very undervalued
12 Undervalued
10 Undervalued
8 Borderline undervalued
7 Fairly priced
6 Fairly priced
5 Borderline overvalued
4 Overvalued
3 Overvalued
2.5 Very overvalued
2 Very overvalued

Just look at the numbers right next to the wordings. Ive amended above.

This is gross rental yield. Not net.

It wont get closed if everybody can comment in a mature manner. Articles and discussions like these are meant to educate.

Yes about 4%.

Yes agreed. Landed property generally has better sustaining power while condo's provide quicker rate of return.

Bro, im sure you know that sales of new launches are never a yardstick of the future capital appreciation rite? That's just the herd mentality. Sometimes the herd is right but sometimes the herd can be dead wrong. Watch National Geographic and ull see some resemblance. Fennel is a good product if investors have the holding power to go beyond 2017. If not, they are treading on dangerous water. Same as those who rushed to buy Tropicana Gardens in Kota Damansara. Many of them are very happy with their paper gains. But will these paper gains translate into actual subsale upon VP? We'll have to wait and see.

Havent seen you around for some time. How have u been? its been a while eh?

I don't see anybody complaining about high property prices (at least not on this thread). High property prices is not an issue compared to high and unsustainable prices. You need to know the difference.

Besides, im also a property investor but a very prudent one. I was looking to purchase my 5th before end of this year but with the latest news, ive adopted a wait and see approach.

No housing loans need to be paid up in 10 years. This clause is only for the refinanced amount that's greater than the original loan amount.

Aiyo! Not these 2 condo's la. Very poor sales / capital appreciation. Hold many years also not sure if can make any profit. These 2 condo's good for own stay only. TTDI Plaza is the worst. Bad feng shui. None of the retail outlets there are doing well. So many change of owners. Dunno what's wrong with that place.

Anyway, those prices are the starting auction prices rite? Furnished or bare?

This post has been edited by cybermaster98: Nov 15 2013, 03:42 PM

I think besides the possible hike in the BLR, next year would also see a hike in the stamp duty.

What u mean -BLR7.0?????

When there is a slump, it naturally means that it becomes a buyers market. So sellers need to improvise in order to make a sale e.g lowering price, renovating, offering better quality furnishings, etc. Its already a renters market now and in some areas its already a buyers market. That's why its actually quite scary to see ppl buying up new launches with the herd mentality without doing proper research.

It is our concern. This is the type of mentality which brings about property slumps and crashes. If everybody is a smart investor, would we have property crashes? We will have slumps as a natural cycle but not property crashes.

We can only take advantage if its a slump and not a major crash. Major crashes especially with prolonged periods of recession will result in an economic collapse. When that happens, taking advantage of cheap properties will not be your primary objective. Survival will.

I wasn't asking about the effects of a BLR increase. I was asking what he meant by -BLR 7.0.

Yes that's true but a simple rise of 50 basis points will not add much pressure on owners to sell. I think the real problem for owners will begin when the BLR hits 8.0%. Most investors with multiple properties wouldn't be able to withstand interest rates at this stage. Even I will be in trouble. But I don't see the BLR increasing beyond 7.1% in 2014.