[photopress:real_estate_monaco.jpg,full,alignright]See a headline like that and you immediately think of Shanghai, Beijing with Hong Kong in there as a close runner up. It depends on how you look at it but if you compile a list by calculating an effective annualized rate of return on a property (based on annual cash flows derived from renting and adjusted for capital gains tax, transaction fees, operating costs and maintenance, appreciation and inflation) then nowhere in China is in the race.
The relationship between rental yields and housing costs matters because a low rental yield is a good indication of a stretched market — one that has a bubble — since these markets are more likely to face downward price pressures or grow at a slower rate. Possible higher returns attracts more buyers and pushes up prices. Therefore, at first examination, you would put several places in China at the head of the pack and, on Forbes reckoning, you would be totally wrong.
N.Y.U. Stern School of Business finance professors Anjolein Schmeits and Stijn Van Nieuwerburgh point out this system of calculation doesn’t discount for risk and volatility which makes the figures slightly skewed but would not overly affect the final result.
Forbes took those calculations on the annualized rate of return and then adjusted them to the more familiar price-to-earnings (P/E) measure. And Shanghai and Beijing were very specifically included in the survey and came nowhere in the listings.
The first ten in a list of the most overpriced real estate market in the world:
Monaco P/E: 74.07. Yes, yes, you had forgotten about Monaco and that is an exceptional case and it is our first illustration. But read on.
[photopress:real_estate_rome.jpg,full,alignright]Rome P/E: of 50.51. A slow growth market, which remains very expensive. And that is our second illustration.
Paris P/E: 37.45. The capital costs associated with buying a home here are boosted by high transaction tax on buyers (11.5%) and sellers (4.8%).
Madrid P/E: 30.30. According to the Bank of Spain, rental yields as a percentage of cost here have been reduced by half over the last seven years.
Los Angeles P/E: 31.25. Market was built up largely on speculators who subsequently exposed it to the credit problems now dogging the market.
Vancouver P/E: 28.61. Vancouver has one of the lowest rental yield rates of any city measured despite high prices.
Vienna P/E: 25.77. Despite the high prices prime real estate attracts the market of potential buyers isn’t very large.
Auckland P/E: 25.64. Real estate prices appear inflated based on rental yields and New Zealand growth trends.
Zurich P/E: 25.19. Swiss properties appreciated quickly. Never a good sign when properties are expensive to begin with.
Oslo P/E: 23.45. Norwegian housing prices have exploded in the last 10 years, growing by 149.54%, which has quickly made Oslo one of the most expensive cities in Europe.
This is only one way of measuring the most over-priced real estate in the world but it is fascinating that not one city in China is even in the race.