Buy a home in Monaco and you'll enjoy iconic beaches, glamorous casinos, a renowned arts and music scene, pulsating nightlife and boutique-packed boulevards. You'll also pay for it.
That's because the Mediterranean principality tops our list of the world's most overpriced real estate markets. The rankings were compiled by calculating an effective annualised 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. We then flipped the return rate to resemble the more familiar price-to-earnings (P/E) measure.
Monaco's housing market earned a P/E ratio of 74.07. What's more, the well-earned moniker of "tax haven" apparently doesn't apply to transaction costs, which rack up to a 20 per cent premium when buying and selling a property.
Rome landed at No. 2 with a P/E of 50.51; it's a slow growth market, which remains very expensive. Representing North America in the world's top 10 were Los Angeles (5th place at 26.88) and Vancouver (6th at 26.81).
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. India's disparate markets illustrate this. Bangalore has a 9.7 per cent rental yield helping it to an 8.74 P/E, a good sign the market has room to grow. Last year prices climbed there by 16.5 per cent. Mumbai, which posted a P/E of 17.21 per cent, saw prices grow 6.6 per cent.
(Via Rediff.com)
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