· UBS Wealth Management’s UBS Global Real Estate Bubble Index report analyzes residential property prices in 18 select cities around the world.
· Since 2015, overvaluations have become more pronounced in a majority of cities. Vancouver faces the greatest risk of a housing bubble.
· However, among the four most important financial centers bubble risk was on the rise only in London. In New York, Singapore and Hong Kong valuations stagnated or decreased the last four quarters.
Housing markets are again overheating, just a few years after the last major wave of a global correction. The UBS Wealth Management Global Real Estate Bubble Index indicates a significant overvaluation of housing markets in some urban centers.
Vancouver tops the index in 2016. Bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong. Deviations from the long-term norm point to overvalued housing markets in San Francisco and Amsterdam. Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo and Frankfurt. In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago’s housing market remains undervalued relative to its own history.
Claudio Saputelli, Head of Global Real Estate in UBS Wealth Management’s Chief Investment Office, says: “House prices of the cities within the bubble risk zone have increased by almost 50% on average since 2011. In the other financial centers, prices have only risen by less than 15%. This gap is out of proportion to differences in local economic conditions and inflation rates. What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy. When combined with rigid supply and sustained demand from China, this has produced an “ideal” setting for excesses in house prices.”
Matthias Holzhey, Real Estate Economist in UBS Wealth Management’s Chief Investment Office, says: “The situation is fragile for the most overvalued housing markets. A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time.”
How to identify a bubble
The term bubble refers to a substantial and sustained mispricing of an asset. A bubble cannot be proven conclusively unless it bursts, but recurring patterns of property market excesses are observable in the historical data. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns in select global financial centers. The index uses the following risk-based classifications: depressed, undervalued, fair-valued, overvalued and bubble risk. Even in the cities with the clearest signs of a real estate bubble, it is not possible to predict exactly the timing and duration of a correction.
The analysis is complemented by a comparison of current price-to-income (PI) and price-to-rent (PR) ratios. Low affordability indicated by the PI ratio points to diminished long-term price appreciation prospects, while high PR multiples indicate a dangerous dependence on low interest rates.