The global real estate boom is nearing its end as house price growth in 25 major cities around the world accelerated to an average of 10% between mid-2021 and mid-2022, according to the bank’s analysis. UBS Swiss business.
The UBS Global Real Estate Bubble Index 2022, an annual study by UBS Global Wealth Management’s chief investment office, indicates that imbalances in global real estate markets are too high and prices are out of sync with rising interest rates.
Toronto and Frankfurt lead the index this year, with both markets exhibiting the characteristics of a clear price bubble. Risks are also increasing in Zurich, Munich, Hong Kong, Vancouver, Amsterdam, Tel Aviv and Tokyo.
In the United States, all five cities analyzed fall into the “exaggerated” rating area, with Miami and Los Angeles more unbalanced than San Francisco, Boston and New York. The Stockholm, Paris and Sydney real estate markets also remain overvalued despite some calming trends.
Despite a prosperous year, Dubai’s real estate market is in the fair value region.
Maximum scores
Housing price growth in the 25 cities surveyed increased by almost 10% on average from mid-2021 to mid-2022, the highest annual growth rate since 2007.
All but 3 cities – Paris, Hong Kong and Stockholm – have seen an increase in house prices. In addition, an acceleration in the growth of outstanding mortgages was seen in almost all cities and, for the second consecutive year, household debt grew faster than the long-term average.
interest-driven imbalances
According to the report, due to low interest rates over the past decade, house prices have steadily diverged from income and rents. Cities in the bubble risk zone today saw price increases averaging 60% in inflation-adjusted terms during this period, while real incomes and rents only increased by about 12%.
Mortgage rates have nearly doubled, on average, in all cities surveyed from their low point in mid-2021. In addition to rising property prices, the financially affordable living space for a highly skilled service worker is, in La average is a third lower than before just before the pandemic.
Claudio Sabotelli, Head of Real Estate at UBS Asset Management’s main investment office, said: “Inflation and capital losses due to the current turbulence in the financial markets are reducing households’ purchasing power, limiting the demand for Additional Living Space: Housing is becoming less attractive as an investment, as borrowing costs in many cities increasingly outweigh the returns on buy-to-let investments.
UBS real estate price index
Geneva and Zurich
Continued strong investment demand in a negative interest rate environment was the main driver of price developments in Zurich. Housing prices in the region have risen by around 20% since the start of the pandemic. In general, the relationship between purchase and rent prices is unbalanced and the market is in the bubble risk area.
While the price-to-rent ratio has reached high levels that are not in line with interest rates in Switzerland’s neighboring Geneva, the city has entered the “exaggerated” phase, according to UBS’s rating. The city has lagged behind Zurich in terms of price and population growth as people in Geneva move to other, more affordable areas, according to the report.
Frankfurt and Munich
Frankfurt and Munich emerged as the most vulnerable cities within the Eurozone to the risks of a housing bubble. Both German cities have seen property prices more than double in nominal terms over the past decade, although current growth has slowed to around 5% between mid-2021 and mid-2022 from previous levels of more than 10%. .
Amsterdam
The Amsterdam property market experienced the strongest price growth among the Eurozone markets with 17% in nominal terms and the city is now classified in the bubble danger zone.
Strong economic fundamentals will not prevent a correction if mortgage rates rise further.
Middle East
Dubai’s real estate market has been volatile over the past two decades as demand is closely related to the evolution of oil prices. High oil prices and the immigration boom revived the market last year.
House prices increased 10% between mid-2021 and mid-2022. Rents have outpaced the growth rate of house prices in the past four quarters. Consequently, the market remains fair value.
Tokyo
House prices in Tokyo have been rising almost continuously for more than two decades, supported by attractive financing conditions and population growth. Imbalances have reached the bubble risk threshold as affordability continued to deteriorate. More recently, however, signs of weakness have emerged: price growth halved to 5% year-on-year, falling below the national average for the first time in a decade.
Hong Kong
Hong Kong’s real estate market experienced a nominal price correction of around 4% between mid-2021 and mid-2022, the weakest growth rate of all cities analyzed. However, the market has not yet left the danger zone of the bubble.
The most dangerous
Real house price levels in Vancouver and Toronto have more than tripled over the past 25 years. The indicator has been flashing warning signs for the past two years. The most recent price increase was another 35% during the pandemic. The recent Bank of Canada interest rate hikes are likely to be the last straw that broke the camel’s back. A price correction is already in progress.
