Price increases for housing in many of the world's top cities have come to a standstill over the past year after adjusting for inflation.
This is the first time since 2012 that average price growth has come to a halt in the 24 cities included in the UBS Global Real Estate Bubble Index. Real prices have fallen on average by 10% in the four cities we identified in 2016 as being at greatest risk of being in a bubble – London, Sydney, Stockholm, and Vancouver.
Our latest survey shows that the market is not as extended as prior to the Great Financial Crisis. Growth in borrowing is on a par with GDP growth in contrast to the run-up to the GFC, when outstanding mortgage volumes increased by up to 2.5 percentage points faster than GDP. But we see reasons why the market may cool further and, aside from select cities, we believe investors will generally need a longer time horizon to see capital gains.
Affordability is a headwind for further price gains in many cities
If employees cannot afford an apartment with reasonable access to the local job market, the attractiveness and growth prospects of the city in question drop. The median house price-to-income ratio has increased from five to seven years in the cities over the last decade. Affordability has worsened the most in Hong Kong and London over this period and improved the most in Singapore.
Regulatory interventions to curb further appreciation are an increasing risk in some cities
The decoupling of home prices from local incomes clouds the picture. In the long term, the absence of economic viability leads to a deterioration in many cities’ attractiveness and favors a shift in jobs to the suburbs. Hence, the potential for political intervention in the housing market increases and so does the risk of negative consequences for investors.
Potential bubbles continue to inflate in select cities, in our view
Index scores have increased in all cities within the Eurozone, driven by low interest rates. Paris and Frankfurt are now in bubble-risk territory. Frankfurt was the only city to see a double-digit price increase, which were common globally in previous years.
So while property can be an important part of any investors' wealth creation plan, those who buy a city apartment at current high valuations are likely to have to adjust to a lengthy lean period in our view. For more details read our UBS Global Real Estate Bubble Index.