In many cities, there is not enough housing supply. And by its very nature, supply cannot be expanded at will in the short term. Thanks to urbanization, this means property prices should rise significantly in the long run—more or less summing up the common narrative on the value growth of urban homes. The strong real estate boom of the last decade underlines this credo once again. However, if urban residential rents are used as a benchmark, the supposed scarcity effect evaporates: rents have only risen hand in hand with local wages over the same period.
The main reason for the exorbitant increases in home prices thus lies elsewhere. Indeed, the property market has long been supported by one major buttress in particular: central banks. Ultra-low financing conditions and demand outpacing construction have led to increasingly optimistic price expectations among buyers. Even the most buoyant expectations have been exceeded in some cases in recent times. As a result, the imbalances have become increasingly severe.
But the picture is quickly changing. Interest rates—and in turn, financing costs—have climbed in recent months to combat elevated inflation. At the same time, several shocks have rocked financial markets worldwide. Consequently, the willingness to pay for owner-occupied homes is likely to take a hit. In cities with strong population growth, such an adjustment could manifest in the form of a prolonged stagnation in nominal purchase prices and a price correction in real terms—i.e., adjusted for inflation. But as real estate markets rarely trend sideways, this is not the most likely outcome.
With the UBS Global Real Estate Bubble Index we keep you up-to-date on the latest developments across global urban housing markets. Sao Paulo is the first South American market to be included in our report.