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UBS Wealth Management launches UBS Global Real Estate Bubble Index for select urban housing markets worldwide; most cities overvalued (GLOBAL VERSION)
- UBS CIO Wealth Management's new UBS Global Real Estate Bubble Index report analyzes residential property prices in 15 select cities around the world.
- Twelve of the 15 urban centers studied are either overvalued or in danger of a housing bubble. London and Hong Kong face the greatest risks.
Zurich, 29 October 2015 – Real estate prices in many global cities have doubled since 1998 in real terms. On average, they are higher than before the 2007-08 financial crisis.
UBS Chief Investment Office Wealth Management's Global Real Estate Bubble Index, which launches today, finds that housing markets in most cities studied are overvalued. The risk of a residential property bubble is most distinct in London and Hong Kong.
Deviations from the long-term norm point to significantly overvalued housing markets in Sydney, Vancouver, San Francisco and Amsterdam. Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore. The US cities of New York and Boston are fair-valued relative to their own history, while Chicago is undervalued.
Claudio Saputelli, Head Global Real Estate in UBS CIO WM, says: "A mix of optimistic expectations, favorable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow."
The term bubble refers to a substantial and sustained mispricing of an asset. A bubble cannot be proven conclusively unless it bursts, but recurring patterns of property market excesses are observable in the historical data. "It is essential to identify the signs of a bubble early on – that's why we have launched the UBS Global Real Estate Bubble Index," Saputelli states.
How to identify a bubble
The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns in select global financial centers. The index uses the following risk-based classifications: depressed, undervalued, fair-valued, overvalued and bubble risk.
The analysis is complemented by a comparison of current price-to-income (PI) and price-to-rent (PR) ratios. Low affordability indicated by the PI ratio points to diminished long-term price appreciation prospects, while high PR multiples indicate a dangerous dependence on low interest rates.
Matthias Holzhey, economist at UBS CIO WM, says: "House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly skilled service sector."
UBS Global Real Estate Bubble Index: http://www.ubs.com/global-real-estate-bubble-index
Further information on UBS Wealth Management's Chief Investment Office: www.ubs.com/cio
UBS Switzerland AG
Claudio Saputelli, Head Swiss & Global Real Estate, Chief Investment Office WM
Phone +41-79-513 50 45, firstname.lastname@example.org
Dr. Matthias Holzhey, Head Swiss Real Estate Investments, Chief Investment Office WM
Phone +41-44-234 71 25, email@example.com