Toronto and Frankfurt exhibit the most elevated risk levels on housing markets, according to the UBS Global Real Estate Bubble Index. Risks are also elevated in Zurich, Munich, Hong Kong, Vancouver, Amsterdam, Tel Aviv, and Tokyo, the yearly study which analyzed residential property prices in 25 major cities around the world reveals.
In the US, all five analyzed cities are in overvalued territory with the imbalance more distinct in Miami and Los Angeles than in San Francisco, Boston, and New York. Housing markets in Stockholm, Paris, and Sydney remain overvalued despite some cooling trends. Other housing markets with signs of overvaluation include Geneva, London, Madrid, and Singapore. Sao Paulo – an addition to this year’s index – is fairly valued alongside Milan and Warsaw. Despite a buoyant year, Dubai’s housing market is in fair-value territory too, UBS said.
Nominal house price growth in the 25 cities analyzed accelerated to almost 10% on average from mid-2021 to mid-2022, the highest yearly growth rate since 2007.
In fact, all but three cities – Paris, Hong Kong, and Stockholm – saw their house prices climb. On top of this, an acceleration in the growth of outstanding mortgages was evident in virtually all cities, and for the second year in a row, household debt grew significantly faster than the long-term average.
Index scores have not increased on average compared to last year. Strong income and rental growth have mitigated the further rise of imbalances. Housing prices in non-urban areas have increased faster than in cities for the second consecutive year. Additionally, price growth has slowed remarkably in inflation-adjusted terms. But current valuations are highly elevated.
Rising rates bring imbalance to the fore
As a result of low interest rates, home prices have continuously drifted apart from incomes and rents over the past decade. Cities in today’s bubble risk territory, have experienced price ascents by an average of 60% in inflation-adjusted terms during this period, while real incomes and rents have increased by only about 12%.
Mortgage rates have almost doubled on average across all cities analyzed since their lowest point in mid-2021. Combined with notably increased real estate prices, the amount of living space that is financially affordable for a highly-skilled service worker is, on average, one-third lower than it was right before the pandemic. Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, adds: “Inflation and asset losses due to current turmoil in the financial markets are reducing household purchasing power, which curbs demand for additional living space. Housing is thus also becoming less attractive as an investment, as borrowing costs in many cities increasingly exceed the yields of buy-to-let investments.”
Game over
The (still) robust labor market has therefore become the last pillar of support for the owner-occupied housing market in most cities. With a deterioration of economic conditions, this too is at risk of faltering. Matthias Holzhey, lead author of the study at UBS Global Wealth Management, concludes: “Indeed, we are witnessing the owner-occupied housing boom finally under pressure globally, and in a majority of the highly-valued cities, significant price corrections are to be expected in the coming quarters.”
