Are these European Property Markets Still In Bubble Trouble?

USA property…and how this should help guide your investment decisions on property in the USA and Europe.

When I talk to my fellow property investors, few of them have been mentioning bubbles these days. Most think that where property bubbles have existed this past seven years, they have long since burst and those same investors are now waiting for a fresh uplift.

However sometimes you find an alarming bit of research out there. The kind of research that can make you think again about investing in some countries.

One such article came to my attention in the FT recently when it suggested that there may be some countries that are still in bubble trouble.

The research centred on a chart put together by Deutsche Bank which looked at price to income and price to rent. Surprisingly, despite significant falls in prices already, Spanish property still has some way to go before it falls to roughly where it should be in terms of value both for rent and for price to income.

In fact the ratio would need a readjustment of around -25% before fair value is reached. Even more surprisingly, a lot more could be taken off the value of UK property before it returns to what is considered ‘fair value’.

While the above markets cannot be ruled out on the strength of this research alone, it highlights that 25 to 30% will need to be knocked off the value of properties you invest in within those countries before they begin to look attractive.

U.S. property on the other hand shows up as outstandingly good value when it comes to price and slightly less so when it comes to rents, however the latter is certainly a bonus for landlords. We could conclude from countries in this sample that the U.S property market comes out on top for investors.

The USA is the only country included in this chart that realistically offers investors the perfect package.

We could also include Korea, however this would be an incredibly complex option and a non-starter if, like me, you like to keep things simple.

By investing in USA property, investors are getting a nice cocktail of rents that are higher than they should be and properties prices that are nearly 15% below the value they should be.

At the other extreme, looking at the chart below, you might be in a pretty perilous position now if you were to invest in countries like Norway or Belgium, with prices nearly 30% above what they should be according to the measures used by the bank.

So what can we learn from this as investors?

We can say for certain that it is more important than ever to opt for heavily discounted property in Europe in areas where there is high rental demand.

In the U.S meanwhile, you can be confident that with property values falling so far from their peak and rents high, this will be the easiest market to find property that pays for itself and keep yourself out of any bubble trouble.

Where will you be investing this year? The USA or Europe?

Kind regards

Loxley McKenzie
Managing Director