According to the latest report from UBS Global Real Estate Bubble Index , the risk of a bubble in global real estate markets continues to decline. Despite this general trend, some cities remain highly likely to experience price increases to critical levels. Tokyo and Zurich are experiencing elevated risks, although the latter has seen a decline compared to last year. Los Angeles, Toronto and Geneva are also among the cities with growing real estate risks.
UBS conducted a study analyzing residential property prices in 25 major cities around the world. In some of them, real prices for residential properties have already reached minimum values. Medium risk is observed in cities such as Amsterdam, Sydney and Boston. This category also includes cities that have seen significant price adjustments, such as Frankfurt, Munich, Tel Aviv and Hong Kong. Vancouver, Dubai, Singapore and Madrid are also in this category. However, Dubai showed the largest increase in risk among all the cities analyzed.
There is a low risk of a housing bubble in San Francisco, New York and Sao Paulo. In Europe, the risk in the housing market in London, Paris, Stockholm and Milan also remains low after a significant decline in the index. Warsaw and Sao Paulo showed the lowest risk of all the cities analyzed.
Inflation-adjusted home prices have fallen by 15% on average since mid-2022, when interest rates began to soar, explains Claudio Saputelli of UBS Global Wealth Management , cities that have shown high risk of a housing bubble in recent years are now experiencing significant price corrections.
Prices fell the most in Frankfurt, Munich, Stockholm, Hong Kong, and Paris, down 20% or more from their post-pandemic highs. Vancouver, Toronto, and Amsterdam also saw significant declines of around 10%. However, strong corrections continued in Paris and Hong Kong. In contrast, residential property prices continued to rise at a rapid pace in Dubai and Miami. In addition, some cities with severe housing shortages, such as Vancouver, Sydney, and Madrid, have seen real prices rise more than 5% compared to last year.
Stabilization factors
Average rents have risen by 5% over the past two years, offsetting the decline in affordability for professionals. However, rising rents are making the situation worse, as most major cities have limited supply of new properties on the market. High interest rates and rising construction costs have hurt new construction, further reducing permits.
Looking ahead, the dynamics of the residential property market may improve. Rising rental rates are supporting interest in purchasing residential property in cities. It is expected that falling interest rates may again make buying more profitable than renting. As the availability of residential property improves, buyers will return to the market, which may lead to a new surge in prices, depending on the economic situation.
Europe
London’s residential property market has lost around 25% of its value since its record high in 2016. The expected cut in interest rates by the Bank of England could stimulate demand for property purchases, especially as rental prices continue to rise. However, the situation in the new home market remains uncertain, as tax policies for wealthy buyers could negatively affect demand in this segment of the market.
In Stockholm, between 2009 and 2021, falling mortgage rates have driven up property prices by almost 90%, far outpacing household incomes and rental costs. However, rising interest rates and a weakening economy have led to a sharp drop in demand, causing prices to fall by 30% over the past three years. However, as economic conditions improve, demand for residential property purchases may begin to rise again.
Warsaw saw its property prices rise by 30% in the decade from 2012 to 2022. A favourable labour market, an expanding metro network and modern housing estates have made the city attractive to both new residents and investors buying properties to rent out. A government subsidy programme that began in 2023 has prompted a new surge in purchases, but further price growth may slow in the coming months.
Frankfurt and Munich were at high risk of a property bubble in 2022. However, rising mortgage rates have pushed prices down by around 20% from their peaks. Expected interest rate cuts and limited supply could help prices recover in these cities.
In Paris, residential property prices rose 30% between 2015 and 2020, helped by low mortgage rates and strong demand from foreign buyers. However, migration, rising interest rates and rising property taxes have significantly dampened this demand. Inflation-adjusted prices in Paris have fallen 10% over the past four quarters, making it the weakest European property market of all the cities surveyed.
Milan, on the other hand, has shown stability in its real estate market, where prices continue to rise thanks to a good economy, new construction and an attractive tax policy. However, taking inflation into account, prices and rents remain at 2018 levels.
Madrid is facing a housing shortage, which has led to rental growth of 15% over the past four quarters. Property prices in the city have also risen by 5% since mid-2023, despite difficult financing conditions.
In Amsterdam, residential property prices doubled between 2012 and 2022. High inflation and worsening credit conditions led to a decline in purchasing power and a decline in demand for residential property, leading to a 15% decline in prices in 2022-2023. However, the limited supply of residential property quickly stabilized the market and prices began to rise again.
Middle East
In Tel Aviv, property prices tripled in the twenty years from 2002 to 2022, helped by low rates and a shortage of housing. However, rising interest rates led to a 10% decline in prices by the end of 2023. Despite this, demand began to recover in 2024 amid fears of missing out on bargains, despite security concerns.
After years of declining prices, the Dubai property market has turned around. Since 2020, the number of transactions has been steadily increasing and the oversupply has been absorbed by the market. Prices have increased by 17% over the last four quarters, which is 40% higher than the 2020 level. However, high speculative transaction volumes and an increase in new supply may lead to a price correction in the short term.
Asia Pacific Region
Hong Kong residential property prices have fallen by double-digit percentages over the past four quarters. Adjusted for inflation, home prices are back to 2012 levels. Transaction volumes in the market have fallen sharply and mortgage lending growth has slowed. Robust economic growth and falling interest rates are expected to help support demand next year.
In Singapore, rental rates have risen faster than purchase prices over the past five years, due to an influx of skilled workers from around the world and construction delays. However, last year, rental rates fell 7% while purchase prices rose 3%. High interest rates and increased supply in the market have led to a build-up of unsold properties, which could limit future price growth.
Sydney has one of the worst affordability rankings of any city in the survey, behind only Hong Kong. Despite this, in real terms, prices have risen slightly over the past four quarters and are now just 10% below their 2022 peak. The main reason for the hold-up in prices is a severe shortage of housing stock.
In Tokyo, home prices have risen 5% in the last few quarters, continuing a trend of recent years. Over the past five years, Tokyo home prices have risen more than 30% adjusted for inflation, more than twice the rate of rent increases. As a result, Tokyo has one of the best home-price-to-income ratios of any city surveyed.
America
High inflation over the past two years has helped to partially correct the imbalances in Canada’s housing market. While affordability has declined, the market overall remains stable. Inflation-adjusted home prices in Toronto and Vancouver are only slightly down from their levels three years ago.
In Sao Paulo, after a long period of stagnation, residential property prices have shown a slight increase for the second year in a row, although they remain more than 20% below their 2014 peak. High interest rates make renting a more attractive option than buying, which explains the almost 10% increase in rents over the past four quarters.
In the U.S., rising financial burdens are making it harder to buy a home, as monthly mortgage payments as a percentage of household income have risen well above levels seen in 2006-07, the height of the housing bubble. However, New York City home prices have remained relatively stable, just 4% below 2019 levels, and have actually risen slightly in the last four quarters.
In Boston, home prices have risen 20% since 2019, outpacing rents and incomes. But the local economy is struggling, which could change the price growth dynamics.
In Miami, booming demand for luxury real estate has driven prices up nearly 50% since the end of 2019, with 7% of that growth coming in the last four quarters. Meanwhile, in Los Angeles, real home prices have remained virtually unchanged since mid-2023, as the city’s population has been shrinking since 2016 due to high living costs and declining economic attractiveness. As a result, rents have not kept pace with overall consumer price levels.
The San Francisco real estate market is showing signs of stabilizing after prices fell 8% last year. Prices have remained stable over the past four quarters. At the same time, lower interest rates and a rising stock market are starting to boost the luxury real estate segment, leading to an increase in sales.
