Recently, leading universal bank in Switzerland UBS issued a report focused on property prices across the world. The report warned of the possible collapse of real estate markets in eight of the world’s most important cities. Moreover, the report also stated that these eight cities are currently in the midst of a housing bubble that could explode at any moment, leading to a sharp decline in property prices. According to the report, this is due to the unhealthy and illogical price increases that have been happening in the last few years.
The bank did not include any Arab cities on the list of the world’s most dangerous real estate markets that are at risk of collapsing. Furthermore, there is no Arab city on the list of medium-risk real estate markets. This means that real estate markets in the region are showcasing positive economic health.
The report, titled the UBS Global Real Estate Bubble Index, measures the risk of a price bubble. Price bubbles are a type of economic bubble that occurs periodically in real estate markets. According to the report, “The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. ”
Here are 8 global cities where property prices are at risk of crashing.
First on the list is Toronto, Canada. According to the report, real housing prices in Toronto has increased by 50% over the last five years. Furthermore, real prices have doubled during the last 13 years. While real rents only increased 5%, real income has increased by less than 10%. Toronto scored 2.12 on the UBS Global Real Estate Bubble Index.
As for Stockholm, Sweden, real prices have managed to increase by 60%. This is more than twice as fast as income has increased during the same time period. With a 2.1 score on the UBS Global Real Estate Bubble Index, Stockholm’s property prices remain in a critical position and are at high risk of crashing.
At 1.92 on the UBS Global Real Estate Bubble Index, Munich, Germany comes in third on the list. Here, house prices have been rapidly increasing. In the last 10 years, real prices have increased by 85%. It is estimated that a skilled service worker would need 8 years to be able to afford to buy a 60m2 apartment. Moreover, Munich is one of four European cities where there has been a sharp increase in the UBS Global Real Estate Bubble Index during the last four quarters.
Canada makes an appearance again on the list, as Vancouver scored 1.8 on the UBS Global Real Estate Bubble Index. While real prices increased by 25% year on year in the middle of last year, the growth slowed down to 7%, which is below the country average. Also, income and rental growth were solid at 3% and 5% year on year respectively. Although valuations have depressed recently, the city’s real estate market still remains in the bubble-risk zone.
Over the past few decades, since 1980, the average real annual price rise in Sydney has been 3.5%. This is the highest among select cities in the report. While prices significantly decreased in 2015 and 2016, they managed to increase by 12% in the last four quarters. Real prices are now 60% higher than 2012. At the same time, incomes have only increased by 2%. Sydney is tied with Vancouver with a score of 1.8 on the UBS Global Real Estate Bubble Index.
Property prices in London are almost 45% higher than 5 years ago and 15% higher than 10 years ago, which was before the financial crisis took place. Moreover, the city’s high-end real estate market suffers from oversupply. Since the middle of last year, prime sales prices and rents have shown a decreasing trend. In the British capital, it would take a skilled service worker about 16 years to purchase a 60m2 apartment around the city center. The UBS Global Real Estate Bubble Index score for London is 1.77.
7. Hong Kong
Coming in seventh on the list is Hong Kong. Here, prices of smaller homes have surged during the last four quarters, increasing by over 20%. Moreover, they are three times higher than 2003, increasing at an average annual growth rate of 10%. While rents have risen by 3% since 2003, incomes have remained the same. This has resulted in less affordable housing. The average living space per person in Hong Kong is only 14m2. The UBS Global Real Estate Bubble Index score for Hong Kong is 1.74.
Last on the list is Amsterdam, with a UBS Global Real Estate Bubble Index score of 1.59. Here, real prices have increased by 30% since 2015, setting a record after being adjusted for inflation. However, income and rental growth have kept up with price growth since 2008. This has allowed for a limited downside risk in the capital city. Amsterdam is also one of the cities where a sharp increase in the UBS Global Real Estate Bubble Index was seen.
In addition, the report showcased cities which are at medium risk due to overvalued property prices. They include Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo, and Geneva. Meanwhile, Boston, Singapore, New York, and Milan are at low-risk with fairly-valued properties. In Chicago, which scored -0.66 on the UBS Global Real Estate Bubble Index, property prices remain undervalued, just as they were last year.