UBS Wealth Management’s UBS Global Real Estate Bubble Index 2017 report analyzes residential property prices in 20 select urban areas around the world.
Toronto faces the greatest risk of a housing bubble, followed in descending order by Stockholm, Munich, Vancouver, Sydney, London, Hong Kong, and Amsterdam.
For buyers, San Francisco is the most overvalued US city in the study, followed by Los Angeles. Boston and the New York metro area are fair value, while Chicago is the only undervalued city in the study globally.
ZURICH – Major urban housing markets in developed economies are still overvalued, and more are at risk of a bubble than in 2016, according to the annual Global Real Estate Bubble Index from UBS Wealth Management’s Chief Investment Office.
Toronto, a new entrant, tops the Index in 2017. As in 2016, Stockholm, Munich, Vancouver, Sydney, London, and Hong Kong are also still at risk of a bubble, along with Amsterdam, which was merely overvalued last year. The only undervalued city in the study is Chicago, with three quarters of cities at risk of a bubble or overvalued. San Francisco is the most overvalued US city in the study, followed by Los Angeles. Boston and the New York metro area are fair value.
Jonathan Woloshin, Co-Head of Americas Fundamental Research at UBS Wealth Management’s Chief Investment Office, said: “The recovery in the US housing market following the bursting of the housing bubble in 2007 has taken national home prices to new heights. In our opinion, housing affordability is significantly more challenged than conventional wisdom posits.”
In San Francisco, in the wake of the technology boom and buoyant foreign demand, real house prices have soared 65% since 2012. Price growth has slowed in recent quarters, but remains 6% above the national average. Despite the thriving economy, average incomes have risen only 10% since 2012 and have not kept pace with house prices, worsening housing affordability further.
In Los Angeles, since 2012, real housing prices have increased by 45%, while across the US the figure is just 23%. The prospering economy and demand from China are fueling the boom and show no sign of decelerating. Prices, however, are still 20% below their 2006 peak. While income growth has escalated in the last two years, housing affordability is stretched and should slow price growth.
In the New York metro area, real prices rose by less than 3% in the past four quarters and are 10% higher than in 2013, when the market bottomed out. The pace of price growth is only half the national average. Manhattan house-price dynamics were much stronger in the last couple of years, propelled by demand from global investors and new luxury developments. But momentum has already slowed in the high-end market.
In Boston, house prices increased by 6% last year and are now 20% higher than in 2012. The regional economy and incomes are growing faster than the national average. Housing affordability remains good compared to other cities in the study. A 60 square meter (650 square foot) flat costs only four annual household incomes. As population growth remains vigorous and supply may be slowing, prices should continue to rise.
In Chicago, since 2012, prices have risen by 15% in real terms but remain 30% below their 2006 peak. Decreasing population, sluggish employment and lackluster economic and income growth hinder the recovery of broad-based demand in the housing market. UBS Wealth Management expects price growth to lag behind the national average in the coming quarters.
With respect to international markets, the outlook in Europe is heating up. Claudio Saputelli, Head of Global Real Estate for UBS Wealth Management’s Chief Investment Office (WM CIO), says: “Improving economic sentiment, partly accompanied by robust income growth in the key cities, has conspired with excessively low borrowing rates to spur vigorous demand for urban housing.” In the Asia Pacific region, Hong Kong and Sydney’s bubble risk have risen since last year. Singapore remains fairly valued, with diminishing risks, while Tokyo has grown more overvalued in 2017.
Superstars take all?
Expectations of long-term rising prices partly explain demand for housing investment in major global cities. Many market participants expect the best locations to reap most value growth in the long run – the superstar model – buoyed by the growth of high-wealth households. Falling mortgage rates over the last decade have also made buying a home vastly more attractive. As long as supply cannot increase rapidly, many buyers see “superstar city” prices decoupling from rents, incomes and national price levels.
The superstar narrative has received additional impetus in the last couple of years from a surge in international demand, especially from China, which has crowded out local buyers. An average price growth of almost 20% in the last three years has confirmed the expectations of even the most optimistic investors. “This thesis has helped fuel overvaluation and even bubble risks in most major urban housing markets in advanced economies globally,” says Matthias Holzhey, Head of Swiss Real Estate for UBS WM CIO. “Taking less risk in overheated markets has historically paid off on average: they delivered worse returns over a full boom-bust period than more balanced markets did.”
UBS provides financial advice and solutions to wealthy, institutional and corporate clients worldwide, as well as private clients in Switzerland. The operational structure of the Group is comprised of our Corporate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. UBS’s strategy builds on the strengths of all of its businesses and focuses its efforts on areas in which it excels, while seeking to capitalize on the compelling growth prospects in the businesses and regions in which it operates, in order to generate attractive and sustainable returns for its shareholders. All of its businesses are capital-efficient and benefit from a strong competitive position in their targeted markets.
UBS is present in all major financial centers worldwide. It has offices in 54 countries, with about 34% of its employees working in the Americas, 35% in Switzerland, 18% in the rest of Europe, the Middle East and Africa and 13% in Asia Pacific. UBS Group AG employs approximately 60,000 people around the world. Its shares are listed on the SIX Swiss Exchange and the New York Stock Exchange (NYSE).