How do you know if a real estate market is overvalued, fairly priced or undervalued?
There is unfortunately and obviously not one answer to this fundamental question. Not only is there not one answer to this question but you will also find that everyone including experts disagree (Real Estate professionals tend to be always positive and bullish while economists have more diverse views) on a real estate market state. It is much easier to agree long time after a bubble that it was in fact a bubble. For instance, it would be hard to find someone telling you that the Tokyo's real estate market in the 1990s was not overvalued. By 2004, residential real estate in Tokyo was only worth of 10% of its late 1980s peak!
It is always difficult to agree on an asset bubble before it pops. However to determine if a real estate market is fairly price you have several tools. The most famous and simplistic ones are ratios like property prices to incomes or property prices to rent. We expect to see these ratios being relatively stables over time. If you follow this logic, this would mean that many countries currently face a bubble. However, not everyone agrees and some believe that some new paradigm can appear that can explain why these ratios would not need to be stable over time. An example of a possible reason is increasing life expectancy. At Anh Thomas Investment, we use a mix of many indicators and have also developed our own model. If you are interested in knowing more about our estimates and market views just click here. You can login at no charge.
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