Hong Kong faces the biggest risk of housing bubble among global cities

The UBS Global Real Estate Bubble Index 2018 index indicated that bubble risk or a significant overvaluation of real estate markets in most major financial markets developed markets was a reality.

The risk of bubble appears in Hong Kong, followed by Munich, Toronto, Vancouver, London and Amsterdam. The main imbalances also characterize Stockholm, Paris, San Francisco, Frankfurt and Sydney. Evaluations are tense in Los Angeles, Zurich, Tokyo, Geneva and New York. In contrast, the real estate markets of Boston, Singapore and Milan appear to have sufficient value, while Chicago is undervalued.

Bubble risk has soared in Munich, Amsterdam and Hong Kong over the last year. Also in Vancouver, San Francisco and Frankfurt, imbalances continued to widen. More generally, the indices have fallen in at least a third of cities. Stockholm and Sydney experienced the largest decline and came out of the territory at risk of bubble. Ratings fell slightly in London, New York, Milan, Toronto and Geneva.

Unlike the boom of the mid-2000s, there is no overall evidence of simultaneous excesses in loans and construction. Outstanding mortgage loans are growing at half the rate of the financial crisis, limiting the economic damage caused by any price correction.

"Although many financial centers remain exposed to a housing bubble, we should not compare today's situation to pre-crisis conditions," said Mark Haefele, Investment Director at UBS Global Wealth Management. "Nevertheless, investors should remain selective in real estate markets in bubble risk areas such as Hong Kong, Toronto and London."

"The median total return of dwellings in the largest financial centers in developed markets was 10% per annum over the last five years, which explains an imputed rental income and accounting profits related to higher prices," he said. Claudio Saputelli, Real Estate Manager at UBS Global Chief Investment Office of Wealth Management. "The profitability of returns in the coming years is debatable. We recommend caution when buying residential real estate in most of the larger developed market cities. "

Over the past year, soaring housing prices in major cities have declined in intensity and scale. Prices for inflation-corrected cities have risen 3.5% on average over the last four quarters, which is significantly less than in previous years, but remains above the average of the last ten years. They remained on an explosive uptrend in the largest economic centers of the euro zone, as well as in Hong Kong or Vancouver. But the first cracks in the foundation of the boom began to appear: housing prices fell by more than 5% in real terms in half of the cities at risk of bubble last year, in London, Stockholm and Sydney.

Accessibility crisis weighs on prospects

The median multiple of the price / income ratio (CP) of study cities rose from 5.5 in 2008 to 7.5 today. Most households can no longer afford to buy property in major financial centers without substantial inheritance. In the last five years, as property has become too expensive for citizens in almost all cities, additional regulations have been introduced, ranging from stamp duty collection to rent control measures. Such regulations, combined with tighter credit conditions, can abruptly end a housing boom, as the current example of Sydney shows. Overall, poor accessibility compromises the long-term growth potential of cities and could lead investors to re-evaluate their expectations for future capital gains.

Regional Perspectives

Europe and Switzerland

In Switzerland, housing prices in Zurich and Geneva remain poor. Stricter regulation of mortgage markets and higher vacancy rates for rental apartments limit benefits. All cities in the euro zone, with the exception of Milan, have higher indices over the last four quarters. Strong revenue growth, excessively low borrowing rates and bullish expectations have led to sharply higher valuations and increased risk of local bubbles. UBS Global's UBS Global Real Estate Bubble score for London fell for the second year in a row, but remains in the bubble risk zone.

United States

Overall, the index scores for US cities in this study are lower than their 2006 peak values. The diverging market valuation rates have since reflected regional differences in economic growth. In Boston and Chicago, valuations remained generally low. The New York score fell slightly in view of the lack of price growth over the last four quarters. In contrast, scores increased in the west coast cities of Los Angeles and San Francisco.

APAC

In Asia, Hong Kong leads the index in 2018. Housing prices have continued to rise by almost 10% per year since 2012. In Singapore, inflation-adjusted prices have experienced a dramatic recovery in the world. last four quarters of 9%. However, the city remains in fair territory. Singapore is one of the few cities in this study whose affordability has improved over the past decade.