According to the economists of Allianz Group and Dresdner Bank, the residential property market in several industrial countries has seen prices overshoot substantially in recent years. The long phase of low interest rates would indeed appear to warrant a steep rise in fundamental terms. Nonetheless, the increases of 59 % in the UK, 52 % in Spain and 25 % in the USA between Q1 2001 and Q4 2003 go way beyond what fundamentals might suggest. It can therefore be assumed that all three markets are now substantially overvalued – according to our calculations, to the tune of 16 % in the UK, 10 % in the USA and 4 % in Spain.
International real estate markets: cycle, over-valuation or bubble?
Moreover, in the UK and the USA a mortgage system supportive of extremely aggressive lending practices contributed to the overshoot. In Spain, by contrast, the mortgage system had a stabilizing effect.
This does not necessarily mean that prices are set to collapse in the countries under review. But the greater the extent of the overvaluation, the more likely this is.