The world-famous Swiss bank has published its Global Real Estate Bubble Index 2023. The analysts have regarded residential property prices in 25 major cities around the world and identified the ones that remain in the housing bubble risk category. And there are also cities where real estate prices remain on fair level.
The rating. The housing market is typically one of the most stable and important elements of any modern economy. The UBS Global Real Estate Index 2023 is aimed to track the housing bubble risk in major cities of the world.
What is a "bubble"? Price bubbles are a recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. The UBS Global Real Estate Bubble Index measures the risk of a real estate bubble based on such models.
How did they count? The index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to rent ratios (fundamental valuation), change in mortgage-to GDP ratio and change in construction-to-GDP ratio (economic distortion), and city-to-country price ratio.
In the bank's understanding, any city with a score above 1.5 on this index is considered to be at risk of a bubble.
The main trends:
- The global surge in inflation and interest rates over the past two years has led to a sharp decline in imbalances in the housing markets of global financial centers on average. This year only two cities – Zurich and Tokyo – remain in the bubble risk category, down from nine cities a year ago.
- House price growth has suffered due to rising financing costs as average mortgage rates have roughly tripled since 2021 in most markets. Annual growth in nominal prices in the 25 cities analyzed came to a standstill after a buoyant 10% rise a year ago.
- Inflation-driven income growth, as well as price corrections, have not been enough to meaningfully improve affordability. On average, the amount of living space that is financially affordable for a skilled service worker is still 40% lower than before the pandemic began. More downside in prices – at least in real terms – is likely if interest rates remain at their current elevated levels.
- But in some cities, the seeds for the next property price boom have already been sowed. Hybrid working has not led to a sustained weakening of demand for city living, and housing shortages are likely to worsen as fewer building permits are issued recently – particularly in European urban centers. UBS experts believe house prices could recover as soon as financial conditions for households improve.
Two cities at risk of a bubble:
- Zurich, Switzerland
- Tokyo, Japan
Nine cities in the world with fair real estate prices:
- Milan, Italy
- New York, USA
- Singapore
- Madrid, Spain
- Boston, USA
- San Francisco, USA
- Dubai, UAE
- Sao Paulo, Brazil
- Warsaw, Poland
Source: UBS
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