UBS CIO Wealth Management's new UBS Global Real Estate Bubble Index report analyzes residential property prices in 15 select cities around the world.
Twelve of the 15 urban centers studied are either overvalued or in danger of a housing bubble. London and Hong Kong face the greatest risks.
Zurich and Geneva are overvalued, but affordable compared with other cities
Zurich, 29 October 2015 - Real estate prices in many global cities have doubled since 1998 in real terms. On average, they are higher than before the 2007-08 financial crisis.
UBS Chief Investment Office Wealth Management's Global Real Estate Bubble Index, which launches today, finds that housing markets in most cities studied are overvalued. The risk of a residential property bubble is most distinct in London and Hong Kong.
Deviations from the long-term norm point to significantly overvalued housing markets in Sydney, Vancouver, San Francisco and Amsterdam. Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore. The US cities of New York and Boston are fair-valued relative to their own history, while Chicago is undervalued.
Claudio Saputelli, Head Global Real Estate in UBS CIO WM,says: 'A mix of optimistic expectations, favorable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow.'
The term bubble refers to a substantial and sustained mispricing of an asset. A bubble cannot be proven conclusively unless it bursts, but recurring patterns of property market excesses are observable in the historical data. 'It is essential to identify the signs of a bubble early on - that's why we have launched the UBS Global Real Estate Bubble Index,' Saputelli states.
How to identify a bubble
The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns in select global financial centers. The index uses the following risk-based classifications: depressed, undervalued, fair-valued, overvalued and bubble risk.
The analysis is complemented by a comparison of current price-to-income (PI) and price-to-rent (PR) ratios. Low affordability indicated by the PI ratio points to diminished long-term price appreciation prospects, while high PR multiples indicate a dangerous dependence on low interest rates.
Matthias Holzhey, economist at UBS CIO WM, says: 'House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly skilled service sector.'
Stretched valuations in Zurich and Geneva
Zurich and Geneva are positioned in the lower half of the 'overvalued' range. At the end of 2011, Geneva was still classified as having a bubble risk. 'A gradual cooling like that seen in Geneva over the last three years rarely happens in international housing markets', Holzhey states. 'The drop in the index is attributable to slightly declining prices coupled with stable income and rents and some catching-up done in the other parts of the country.'
In contrast to Geneva, Zurich has experienced a 30% rise in housing prices since the end of the financial crisis. This represents the second-highest growth rate of all the cities monitored. Despite the overvaluation, purchasing an apartment remains feasible in both Zurich and Geneva compared to many other world cities. The record-high PR ratio, which reflects the distorted interest rate environment, is conspicuous, however.
UBS Global Real Estate Bubble Index: http://www.ubs.com/global-real-estate-bubble-index
Further information on UBS Wealth Management's Chief Investment Office: www.ubs.com/cio
UBS Switzerland AG