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Property bubbles: the 20 cities most at risk

With the looming possibility of sudden drop offs, UBS says its annual Global Real Estate Bubble Index could help identify the most overvalued property markets.

Property price growth in the developed world has offered investors an average return of 10% over the last five years, according to UBS.

But with the looming possibility of sudden drop offs, the Swiss bank says its annual Global Real Estate Bubble Index could help identify the most overvalued property markets.

The index traces the fundamental valuation of housing markets. It uses the following risk-based classifications: depressed (score below –1.5), undervalued (–1.5 to –0.5), fair-valued (–0.5 to 0.5), over valued (0.5 to 1.5) and bubble risk (above 1.5).

This classification is aligned with historical bubble episodes.

'We should not compare today's situation with pre-crisis conditions,' said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.

'Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto, and London.'

Here are the top 20 cities they see as most at risk, ranked in descending order.

 

 

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Property price growth in the developed world has offered investors an average return of 10% over the last five years, according to UBS.

But with the looming possibility of sudden drop offs, the Swiss bank says its annual Global Real Estate Bubble Index could help identify the most overvalued property markets.

The index traces the fundamental valuation of housing markets. It uses the following risk-based classifications: depressed (score below –1.5), undervalued (–1.5 to –0.5), fair-valued (–0.5 to 0.5), over valued (0.5 to 1.5) and bubble risk (above 1.5).

This classification is aligned with historical bubble episodes.

'We should not compare today's situation with pre-crisis conditions,' said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.

'Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto, and London.'

Here are the top 20 cities they see as most at risk, ranked in descending order.

 

 

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20. Chicago

Index value: -0.62

2017 ranking: 20

UBS said:

'Inflation-adjusted prices have risen by 15% in real terms since the low point in 2013 but remain almost 30% below their 2006 peak. Inflation adjusted rents declined last year and incomes stagnated.

'Declining population, sluggish employment, lacklustre economic growth and a challenging fiscal outlook hinder a faster recovery of broad-based housing demand.

'We expect price growth to continue to lag the national average.'

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19. Milan

Index value: 0.03

2017 ranking: 19

UBS said:

'Prices have begun rising moderately in and around the central areas, with the time required to sell properties shortening markedly. Inflation adjusted prices remain some 30% below their 2007 peak.

'Despite attractive financing conditions and the best housing affordability among European cities, the housing market recovery is in a very early stage.

'Unless the political situation in Italy turns more predictable and population growth accelerates, we do not expect demand to improve significantly.'

 

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18. Singapore

Index value: 0.44

2017 ranking: 17

UBS said:

'Inflation-adjusted prices staged a fulminant recovery in the last four quarters after six years of correction, rising by 9%.

'Nonetheless, the market remains fairly valued. Prices are 5% below their 2011 peak and the price-income ratio is still shy of its long-term average.

'We expect speculative buying to decline and price growth to decelerate by the end of the year.

'Singapore is one of this study’s few cities whose affordability has improved over the past decade.'

 

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17. Boston

Index value: 0.45

2017 ranking: 16

UBS said:

'House prices have risen roughly in line with the national average despite the better growth of the regional economy and residents’ incomes, and are now up 20% since 2015.

'The city recorded the highest rental growth (+15%) among the US cities in this study over the same time period.

'Overall, housing remains more affordable than in other financial centers. But slowing population growth and rising mortgage rates could limit price appreciation prospects.'

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16. New York

Index value: 0.68

2017 ranking: 18

UBS said:

'New York’s score in the UBS Real Estate Global Bubble Index decreased marginally over the last four quarters, but the city remains slightly overvalued.

'Since 2012 inflation-adjusted prices are up by 25%, rents by 15% and incomes by less than 10%. But annual inflation-adjusted prices fell 2% over the last four quarters, the first decline in several years.

'Should the US Federal Reserve continue its tightening policy, prices may fall further in the coming quarters.'

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15. Geneva

Index value: 0.68

2017 ranking: 15

UBS said:

'Home prices in the Lake Geneva region remain lacklustre.

'They have dropped slightly this year, returning to levels of three years ago. Strict lending rules are keeping them in check, as the city exhibits the lowest affordability in Switzerland.

'So the market has cooled further, in line with the broader Swiss housing market.'

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14. Tokyo

Index value: 1.09

2017 ranking: 14

UBS said:

'The city’s housing market continues to decouple from the rest of the country’s. Since 2015 prices in Tokyo are up 17%, while they are flat nationwide.

'The city’s demographic outlook is relatively supportive as its population is expected to go on growing.

'Low interest rates are also sustaining the local boom, but housing is becoming increasingly unaffordable as income growth lags behind. Buying a 60m2 house already requires 11 yearly salaries of a skilled service worker.'

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13. Zurich

Index value: 1.10

2017 ranking: 12

UBS said:

'Residential market valuation remained virtually unchanged over the past year, with the housing market continuing to occupy moderately overvalued territory,; according to the index.

'Apartment prices in Zurich fell 2% over the last four quarters, slightly less than the nationwide average. Pressure on prices can be attributed to ongoing weak demand for high-end properties.

'The slowly rising vacancy rates for rental apartments lead us to expect that market rents will remain under pressure.

'Buying a medium segment property in Zurich only pays off after more than 36 years – tantamount to the lowest rental yields of all cities in this report.'

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12. Los Angeles

UBS Index value: 1.15

2017 ranking: 11

UBS said: 

'Inflation-adjusted house prices climbed 6% last year and are now 40% higher than in 2013.

'The prospering economy, particularly in technology, media, entertainment and manufacturing, is fueling demand. The lack of available for-sale supply in many submarkets has exacerbated the overheating.

'Although inflation-adjusted prices remain 14% below their 2006 peak, housing affordability is stretched and could lead to slower price growth in light of the rise in mortgage rates.'

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11. Sydney

UBS Index value: 1.29

2017 ranking: 5

UBS said: 

'Prices peaked last summer and have slid moderately since as tighter lending conditions diminished overall affordability.

'To curb foreign demand, the land tax surcharge has also been more than doubled and a vacancy fee has recently been introduced. So the high end of the market has suffered most. The vacancy rate on the rental market has climbed amid higher supply.

'Overall, inflation-adjusted prices remain 50% higher than five years ago, while rents and incomes have grown only at a single-digit rate.'

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10. Frankfurt

UBS Index value: 1.43

2017 ranking: 13

UBS said: 

'House prices have climbed almost 15% in the last year, far higher than the country average.

'The rate of price growth accelerated for the fourth year in a row and is clearly not sustainable. Last year Frankfurt exhibited the fastest house price appreciation of the cities in this study.

'Demand is supported by a dynamic economic environment and prices by a “Brexit gains” narrative. Affordability and price-to-rent multiples still leave scope for more appreciation, but the city is rapidly approaching bubble-risk territory.'

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9. San Francisco

UBS Index value: 1.44

2017 ranking: 10

UBS said: 

'In the midst of a thriving local economy, significant non-cash earnings by many technology employees and buoyant foreign demand, real house prices have increased by 80% in the last six years.

'Price growth has accelerated again in recent quarters, up 12% in the past 12 months.

'Though city inhabitants enjoy the greatest income growth among residents of the US cities in the study – inflation-adjusted incomes rose by 20% in the last decade – affordability has worsened in both the ownership and rental markets.'

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8. Paris

UBS Index value: 1.44

2017 ranking: 9

UBS said: 

'House price growth accelerated in recent quarters on the back of attractive financing conditions, improving economic sentiment and “Brexit-gain” fantasies.

'The market looks increasingly overvalued as incomes and rents stagnate in real terms while prices set all-time highs, leaving Paris with the worst housing affordability in continental Europe.

'Further significant price increases appear highly unlikely.'

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7. Stockholm

UBS Index value: 1.45

2017 ranking: 2

UBS said: 

'Inflation-adjusted prices climbed 60% between 2007 and 2017, which clearly outpaced income and rental growth.

'The boom stemmed from marked population growth in the city centre area. But prices have been dropping since the middle of last year and are off 7% from their peak, despite continued attractive financing conditions.

'The correction seems to be the direct consequence of an exaggerated price surge in recent years that strained affordability and triggered stricter amortization requirements.'

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6. London

UBS Index value: 1.61

2017 ranking: 6

UBS said: 

'The UBS Global Real Estate Bubble Index score for London declined for the second straight year but remains in the bubble-risk zone.

'Overall, inflation-adjusted prices are more than 10% higher than in 2007, when the last bubble burst, while rents have stayed roughly stable and real incomes have gone down by 10%.

'House prices in London have lagged the nationwide average and dropped by 5% in inflation-adjusted terms since mid-2017.

'We expect prices to stabilize but still advise caution given high market valuations and marked political uncertainty.'

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5. Amsterdam

Index value: 1.65

2017 ranking: 8

UBS said: 

'In the last four quarters prices climbed by 12% in inflation-adjusted terms. They are now 60% higher than in 2013.

'Their ongoing explosive growth was fueled by the strongest income increase since 2013 among all cities and attractive financing conditions.

'The city’s housing price rise has more than doubled nationwide averages in the last five years. Given the highly strained affordability, a tightening of lending conditions might end the boom rather abruptly.'

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4. Vancouver

Index value: 1.92

2017 ranking: 4

UBS said: 

'Imbalances increased again as house prices rose in the past four quarters at a double-digit rate in real terms. Real prices have doubled in 12 years.

'The imbalances are mitigated somewhat by income growth and above-average rental growth of 5–7% in nominal terms over the last four quarters. As the government tries to contain speculation, the tax burden is rising for high-end property buyers and foreign purchasers.

'The already strained affordability will become an acute issue if mortgage rates rise further, one that may halt the local market boom.'

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3. Toronto

UBS Index value: 1.95

2017 ranking: 1

UBS said: 

'Since the waning of the housing frenzy in the middle of last year, prices have stabilized over the past four quarters. In inflation-adjusted terms, they are 50% higher than five years ago.

'Last year’s “fair housing plan,” which imposed taxes on foreign purchases and vacant apartments and implemented stricter rent controls, probably contributed to the cooling.

'Higher mortgage costs and tighter lending standards should limit the upside for the time being. But a short-term weakening of the Canadian dollar may again attract foreign buyers.'

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2. Munich

UBS Index value: 1.99

2017 ranking: 3

UBS said:

'Real prices have doubled in the last 10 years and seem to be continuing on an explosive trajectory.

'Nominal rents jumped 9% last year, reflecting record low vacancies, so affordability goes on deteriorating. Purchasing a 60m2 (650 sqft) flat requires of a skilled services employee an all-time high of eight accumulated years of income.

'Construction has already risen significantly in recent years. Should mortgage rates pick up, a correction seems likely.'

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1. Hong Kong

UBS Index value: 2.03

2017 ranking: 7

UBS said: 

'The Hong Kong property market has retained its vibrant momentum.

'Residential market prices have risen again by more than 10% in inflation-adjusted terms over the last four quarters, raising the city’s UBS Global Real Estate Bubble Index score higher within the bubble-risk zone.

'Since 2008 prices have doubled while rents have gone up by 15% and incomes have remained unchanged in real terms.

'A sharp correction seems unlikely, given the pent-up investment demand and ongoing low mortgage rates.

'Price volatility also has to be taken into account: in such a speculative market environment macro-economic uncertainty, e.g. on Sino-US trade or on the RMB, can weight on sentiment at any time.'

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