Real EstateGlobal real estate bubble risk increasing

If you're thinking about buying a house, you want to re-think London, Hong Kong or Munich. According to the UBS Global Real Estate Bubble Index, New York and Milan are fairly valued, while another US city - Chicago - is undervalued.

Real housing prices in Toronto have risen 50 percent over the last five years. (Keystone)

According to the latest edition of 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 percent on average since 2011," CIO real estate specialists Claudio Saputelli and Matthias Holzhey write. "In the other analyzed financial centers, prices have only risen by roughly 15 percent. This gap is grossly out of proportion to the differences in local economic growth and inflation rates. Moreover, real incomes and rents have climbed by less than 10 percent in the same period in the bubble cities."

The bubble risk seems to be greatest in Toronto, where real housing prices have risen 50 percent over the last five years. Stockholm, Munich, Vancouver, Sydney, London, Amsterdam and Hong Kong all remain in risk territory, while Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva constitute the group of "overvalued" cities. In contrast, property markets in Boston, Singapore, New York and Milan seem "fairly valued", while Chicago remains "undervalued", just as it was last year.

Annual price-increase rates of 10 percent correspond to a doubling of house prices every seven years, which is not sustainable," Saputelli and Holzhey say. "Nevertheless, the fear of missing out on further appreciation predominates among home buyers. After all, the price increases appear rational, with attractive financing conditions, with the global increase in wealth seemingly creating constant demand and with building activity unable to keep pace with this demand."

So when will the bubble burst? "The Index does not predict whether and when a correction will set in," Saputelli and Holzhey say. "Historically, vastly overvalued housing markets, as measured by our index, have been associated with a significantly heightened probability of correction and greater downside. A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a decline in house prices."

Read the UBS Global Real Estate Bubble Index published on September 28, 2017.