Using these indicators, OECD countries can be roughly placed into five categories:

1. Where houses appear broadly correctly valued. This category includes the Unites States, where prices have started rising again after a substantial correction; Italy, where prices are falling rapidly; Austria, where prices are rising; and Iceland, Korea and Luxembourg where prices are roughly flat.
2. Where houses appear undervalued and prices are still falling. This category includes European countries hit hard by the crisis – Greece, Ireland, Portugal, Slovenia, Slovakia and the Czech Republic – but also Japan.
3. Where houses appear undervalued but prices are rising. This category includes only Germany and Switzerland, two European countries where strong growth in household disposable income and favourable financing conditions have boosted prices (despite macro-prudential measures in Switzerland).
4. Where houses appear overvalued but prices are falling. This category is the largest as it includes many European countries where the post-crisis housing market correction is still ongoing, most notably Spain, but also the United Kingdom, Belgium, Denmark, Finland, the Netherlands and one non-European country, Australia. While price corrections in these countries are necessary, they are also concerning as they weaken households’ financial health and potentially fragilize banking sectors.
5. Where houses appear overvalued but prices are still rising. This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.

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