Important Signals to Evaluate Property Bubble

I have read a very interesting article from Hong Kong about the types of signals that we can refer to when property bubble is going to burst.

How property bubble is formed in the first place?
Before a bubble bursts, the reaction of the crowds in property investment is indeed important. Generally, their reaction can normally range from pessimistic to optimistic and become over-excited at the end. When the crowds are over-excited, their decisions are not rational most of the time. For instance, they will buy properties regardless of the loan’s interest rate, household saving, property price and risks. When a property bubble bursts, the crowds will resume to pessimistic mode and another repeated cycle will take time to happen again.

There are 3 signals that are worth to take a look when we need to evaluate property market:
1. House price-to-income ratio
For developed countries, typically the ratio will be ranging from 1.8 to 5.5 times. According to the methodology recommended by World Bank to evaluate urban housing, affordable house price-to-income ratio should be 3.0 and below. In another words, we need 3 years to save enough money to purchase a property. For example, Shanghai & Hong Kong (>36.0), Guangzhou (~25.0) and New York (>10.0). However, this index is depending on the location, demography and government’s strategy on that area.

2. Debt-to-income ratio
There is no limit or general definition of how debt-to-income limit should be designed. It’s effect can vary depending on different designs. For example, the limit can be designed to target individual households or the bank’s lending stock. A number of countries have adopted this index by establishing an upper limit to a household’s total loan in relation to its disposable income. This ratio can be compared to worldwide ratio to have an idea about property bubble. Normally, 50-60% is still considered acceptable and note that most of the released data regarding household debt actually includes other debts such as consumer debts and mortgage loans and not only housing loans. Some of the countries/areas which have debt-to-income ratio more than 100% are indeed at higher risk for investment.

3. House price-to-rent ratio
This is referring to home price to annual rental rates. Based on statistics collected during economy crisis in 1997 and 2007, a reference figure can be around 100%. If we observe a figure which is lower (<100%) than the reference, that could be the right period to buy/accumulate properties.

I will discuss in more details in my coming article to relate these 3 signals with Malaysia’s property market. Check out our 2017 outlook for property market. At the same, we should also take into consideration the effect of macro-economy for example interest rate increase by Fed etc. You can also read the recent updates of property related news and like our page here.

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