In many cities, there is not enough accommodation on offer. By its very nature, the housing offer cannot be expanded in the short term. Thanks to urbanization, this means that property prices are expected to rise significantly in the long run.
However, the main reason for the excessive rise in house prices lies elsewhere. The real estate market has long been supported by one pillar: central banks. Extremely low financing conditions and higher demand for construction than for construction have led to increasingly optimistic price expectations among buyers. Even the wildest expectations have been exceeded. As a result, the imbalances have become increasingly severe.
But the picture is changing rapidly
Interest rates – and in turn financing costs – have risen in recent months to combat rising inflation. At the same time, various shocks have rocked financial markets around the world. Therefore, the willingness to pay for housing on credit should decrease. In cities with strong population growth, this correction can take the form of a prolonged stagnation of nominal purchase prices and a correction of prices in real terms, ie adjusted for inflation. But since real estate markets rarely move “back”, this is not the most likely outcome.
What are the latest developments in global urban real estate markets, reveals the latest UBS Global Real Estate Bubble Index report.
Imbalances in global metropolitan real estate markets are heavily inflated and prices are out of sync with rising interest rates, the report said. Against this backdrop, Toronto and Frankfurt lead this year’s edition of the UBS Global Real Estate Bubble Index, with both markets exhibiting distinct property bubble characteristics. Risks are also high in Zurich, Munich, Hong Kong, Vancouver and Amsterdam. Tel Aviv and Tokyo join a cluster of cities in the bubble risk zone for the first time since 2015.
In the United States, in all five cities analyzed, real estate is located in overvalued territory, with a more pronounced imbalance in Miami and Los Angeles than in San Francisco, Boston and New York. Real estate market imbalances remain high in Stockholm, Paris and Sydney, while risk assessments remain unchanged from last year in Geneva and London.
Other real estate markets showing signs of overvaluation are Madrid and Singapore. Sao Paulo, Milan and Warsaw are in a balanced territory. Despite a busy year, Dubai’s real estate market is also in green territory.
