A widely accepted test to determine the market value
of property, is a model based on nominal GDP.
The argument is, that on a macroeconomic
scale, property prices are determined by just two
factors: consumer price inflation and real growth
in the economy (measured by real GDP).
Nominal
GDP captures the combined effect of real economic
growth and price inflation as the variable, it
is measured as economic output in current prices. Basically
it means comparing house prices against economic
growth.
The application of the model is straightforward. Property
price increases should remain in line with the nominal
GDP increases of the economy over the same period.
Whilst
appearing extremely simple in terms of application,
the model carries a high degree of explanatory
power. The graphic (right) illustrates comparisons
with
the UK and USA since 1988. (Red
Line = Nominal GDP, Blue
Line = Property Prices)
From the figure, it can be seen that although
there has been a significant increase recently, current
property prices, compared with economic growth for the
last 16 years, leaves property
deeply undervalued at a 1/3 of its value.
Due
to economic isolation and uncertainty, as well as political
instability, property prices have come off a low base,
caused by deep undervaluation of as much as 20 percent
from the late 1990s – as the economy continues
to grow analysts believe the gap will continue to be
closed creating high capital returns on property investments.
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