UBS Global Real Estate Bubble Index: Which Cities Are At Risk?

Which Cities Are At Risk?

San Francisco, LA are at the highest risk of a housing bubble.

The price of housing has experienced a boom in many cities in North America and around the world over the last few years. Many of these cities are now experiencing reduced housing demand as potential home buyers struggle to afford to buy in previously affordable communities and existing homeowners can’t afford to buy the home they are living in if it were currently for sale.

Rising interest rates around the world and tighter lending criteria imposed by lenders and banks can indicate the end of a housing boom, as is currently the case in Sydney, Australia.

Cities Most at Risk

UBS Switzerland AG issued its Global Real Estate Bubble Index Report in September 2018, which reveals the cities where the price imbalances are currently the greatest.

Price bubbles are a regular occurrence in most property markets—signs of this include the imbalance of housing prices from incomes and rents, excessive mortgage lending and over-heated new home construction.

The report concludes that bubble risk is highest in North America cities like San Francisco, Los Angeles, Toronto, and Vancouver, and globally in Hong Kong, Munich, London, Amsterdam, Stockholm, Paris, Frankfurt, and Sydney. The median price-to-income multiple of the cities in the study increased from 5.5 in 2008, to 7.5 today—an increase of nearly 40 percent in 10 years.

Housing Prices on the Rise

Housing prices of the 20 major cities surveyed increased by 35% on average over the past five years according to the report. Hong Kong was identified as the city with the highest risk of a housing bubble with house prices rising over the last five years at an annual rate of almost 10 percent per annum.

The report rated Toronto and Vancouver to be high on the list but noted that higher stamp duty on foreign buyers has not dampened the price rises in Vancouver but has had a more significant effect in Toronto.

Boston was the only U.S. city surveyed that was ‘fairly’ valued, and Chicago was the only U.S. city that the report considered undervalued.

Singapore was the only city surveyed where there was no difference between housing prices and income growth over the last 30 years. London’s risk rating declined for the second year in a row due to affordability and the ongoing uncertainty with Brexit negotiations with the European Union. New York experienced an average price decline for the first time in many years due to the increase in local taxes and rising mortgage rates.

The report concludes that, in the past, rising interest rates have been the primary cause of price corrections together with affordability, but overpriced markets have been known to exist for many years and to predict corrections in prices is always a difficult task.

To download the entire report, Click Here.