The UBS Global Real Estate Bubble Index is designed to track the risk of housing bubbles in global financial centers. Toronto tops our index in 2017. We discuss the housing markets of select cities on the list and where you'd need to work the longest to buy a flat.
Bubble risk seems greatest in Toronto, where it has increased significantly in the last year. Stockholm, Munich, Vancouver, Sydney, London and Hong Kong all remain in risk territory, with Amsterdam joining this group after falling into 'overvalued' territory last year. Valuations are stretched in Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva as well. In contrast, property markets in Boston, Singapore, New York and Milan seem fairly valued, while Chicago remains undervalued, just as it was last year.
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Where do you need to work the longest to buy a flat?
Buying a 60m2 (650 sqft) apartment exceeds the budget of people who earn the average annual income in the highly skilled service sector in most world cities. In Hong Kong, even those who earn twice the city’s average income would struggle to afford an apartment of that size. House prices have also decoupled from local incomes in London, Paris, Singapore, New York and Tokyo, where price-to-income multiples exceed 10x. Unaffordable housing is often a sign of strong investment demand from abroad, tight zoning and rental market regulations. If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink.
In contrast, housing is affordable in Chicago, Boston, Los Angeles, Milan and Frankfurt, which limits the risk of a price correction in these cities. Due to relatively high incomes, purchasing an apartment is also relatively feasible for residents of San Francisco and most European cities, with the exception of Paris and London.
According to the UBS Global Real Estate Bubble Index, the bubble risk in select world cities has increased significantly over the last five years. Real house prices of those metropolises within the bubble-risk zone have climbed by almost 50% on average since 2011. In the other financial centers we looked at, prices have risen by roughly 15%. This gap is grossly out of proportion to the differences in local economic growth and inflation rates.