In many cities, there is not enough housing supply. And by its very nature, housing supply cannot be expanded at will in the short term. Thanks to urbanization, this means property prices should rise significantly in the long run—more or less summing up the common narrative on the value growth of urban homes. The strong real estate boom of the last decade underlines this credo once again.
However, if urban residential rents are used as a benchmark, the supposed scarcity effect evaporates: rents have only risen hand in hand with local wages over the same period. The main reason for the exorbitant increases in home prices thus lies elsewhere.
Indeed, the property market has long been supported by one major buttress in particular: central banks. Ultra-low financing conditions and demand outpacing construction have led to increasingly optimistic price expectations among buyers. Even the most buoyant expectations have been exceeded in some cases in recent times. As a result, the imbalances have become increasingly severe.
But the picture is quickly changing. Interest rates—and in turn, financing costs— have climbed in recent months to combat elevated inflation. At the same time, several shocks have rocked financial markets worldwide. Consequently, the willingness to pay for owner-occupied homes is likely to take a hit. In cities with strong population growth, such an adjustment could manifest in the form of a prolonged stagnation in nominal purchase prices. But as real estate markets rarely trend sideways, this is not the most likely outcome.
Valuations at Peak Level
Toronto and Frankfurt top this year’s UBS Global Real Estate Bubble Index, with both markets exhibiting pronounced bubble characteristics. Risks are also elevated in Zurich, Munich, Hong Kong, Vancouver, and Amsterdam. Notably, Tel Aviv and Tokyo join the group of cities in the bubble risk zone for the first time since we began to publish this report in 2015. In the US, all five analyzed cities are in overvalued territory with the imbalance more pronounced in Miami and Los Angeles than in San Francisco, Boston, and New York. Housing market imbalances remain high in Stockholm, Paris, and Sydney despite some cooling, while risk valuations are unchanged from last year in Geneva and London. Both those cities rank in overvalued territory as well. Other housing markets with signs of overvaluation include Madrid and Singapore. Sao Paulo—an addition to this year’s index—is fair-valued alongside Milan and Warsaw. And despite a buoyant year, Dubai’s housing market is in fair-valued territory too.
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