Will the global housing bubble burst?

Buying a 60 square meter (650 square foot) apartment is now beyond the budget of those on average annual incomes in the skilled service sector in most cities globally, according to the Global Real Estate Bubble Index 2022 published by Swiss investment bank UBS recently. 

Mortgage rates have almost doubled on average in the 25 cities analyzed in the report and, alongside increased prices, has made housing less affordable.

A skilled service sector worker can afford one-third less housing space than before the COVID-19 pandemic , the report notes, adding that ultralow financing conditions and demand outpacing construction have led to "increasingly optimistic price expectations."

For those who wanted to sell their housing property in 2022 "the most buoyant expectations have been exceeded," with the result that "the imbalances have become increasingly severe."

In cities that the UBS report described as "bubble risk zones," prices have climbed by an average of 60% in inflation-adjusted terms during this period, while real incomes and rents have increased by only about 12%.

Nominal house price growth in the cities analyzed accelerated to 10% from mid-2021 to mid-2022 — the highest increase since 2007, the year before the last financial crisis. The highest regional price growth of over 15% in nominal terms was in North American cities.

Canada's Toronto and Germany's Frankfurt top the UBS survey, with both markets showing "bubble characteristics." Risks are also elevated in Zurich, Munich, Hong Kong, Vancouver and Amsterdam. For the first time, Tel Aviv and Tokyo joined the group of cities in the bubble risk zone.

On top of this, accelerating growth of outstanding mortgages was seen in virtually all cities in the survey and household debt there grew faster than the long-term average.

Housing is relatively affordable in Miami, Madrid, Dubai, San Francisco and Boston, which limits the risk of a price correction in those cities.

Purchasing a 60 square meter apartment is also relatively feasible for residents of Los Angeles, Milan, Geneva and Zurich.

Corrections coming in the US and Europe

Significant price corrections are to be expected "in a majority of cities with high valuations," UBS notes, adding that "they have either already begun, or are expected to start in the coming quarters."

Typical signs of a bubble are a decoupling of prices from local incomes and rents and excessive lending and construction activity.

According to UBS's findings, house prices have continued to rise faster than rents in most cities. With the exception of Tokyo, rents across the board are 7% on average higher than before the pandemic, as the decline in 2020 was followed by a strong recovery. This was most pronounced in the US cities, Dubai, and Singapore.

Munich, Hong Kong and Tel Aviv have the highest price-to-rent ratios, followed by Frankfurt, Geneva and Zurich. Almost half of the covered cities have price-to-rent multiples above or close to 30. A ratio of 15 or less means it's better to buy, while a ratio of 21 or more means it's better to rent. High multiples also indicate a heavy dependence of housing prices on low interest rates.

Outstanding mortgages recorded the strongest increase since 2008. But strong income and rental growth have mitigated the imbalances somewhat. The robust labor market remains a pillar of support for the owner-occupied housing market in most cities, but, as UBS notes, with a deterioration in economic conditions, this too is at risk of weakening.

German major cities Frankfurt and Munich share the biggest risks of a property bubble among European markets, as they've seen property prices more than double in nominal terms over the last decade. Even though price growth has cooled to around 5% from double digit levels before the pandemic, a skilled worker from Munich can now only buy an apartment with one room less than in 2019.

London's housing market is in overvalued territory, and US cities have seen much stronger price growth since the onset of the pandemic compared with previous years, UBS says. Despite this, however, imbalances did not rise further. New York exhibited the lowest price growth since mid-2021 of all US cities analyzed, but remains the least affordable among US cities.

How about Asia and the Pacific?

A 15-year boom once saw Hong Kong record the strongest price growth among all cities in the study. However, since mid-2019, the market has stagnated as the lack of affordability, economic woes and pandemic restrictions hit demand.

In the medium term, an eventual economic recovery in Mainland China could become a new tailwind, UBS says.

While house prices in Singapore added another 11% over the year, prices in Tokyo show signs of weakening. There, growth halved to 5% in year-on-year terms and lagged the nationwide average for the first time in a decade.

The housing market in Sydney has remained outside bubble risk territory since a cooldown in 2018 and 2019. Prices dropped by more than 5% during the second quarter of 2022.

Edited by: Uwe Hessler