The Global Housing Bubble Is Biggest In These Six Cities

One year ago, when UBS last looked at the world's most expensive housing markets, it found that London and Hong Kong were the only two areas exposed to bubble risk.

What a difference a year makes, because in the latest report by UBS wealth Management, which compiles the bank's Global Real Estate Bubble Index, it found a new champion for the title of "world's biggest housing bubble", namely a familiar name, Vancouver, but also that as many as six cities had made the "bubble" category, up from last year's two. Of last year's two "winners", London has been knocked into second place this year, and Hong Kong sixth, but both are still in bubble-risk territory.

Looking at soaring home prices across the globe, UBS has concluded that low interest rates have now created a new global housing bubble in major cities around the world, with Vancouver and London most at risk. Not surprisingly, the Swiss bank notes that ultralow interest rates at global central banks have contributed to overheating in the housing market in recent years.

Vancouver and London came first and second on the 2016 list of cities most at risk of real estate bubbles. Bubble risk was also evident in Stockholm, Sydney, Munich and Hong Kong: house prices in these six cities have increased by nearly 50% on average since 2011. The average price rise in other financial centers has been less than 15%.

Who is to blame for this latest global bubble? Why your friendly, local central banker of course.

As the WSJ summarizes, loose monetary policy at global central banks is a key driver behind rising prices, the report claims. Low interest rates have pushed investors to hunt for returns in tangible assets, “so it is hardly any wonder that housing markets are again overheating,” according to report authors Claudio Saputelli and Matthias Holzhey.

For the European Central Bank, which controls monetary policy for all 19 member countries, the inability to adjust interest rates for particular economic development in separate countries has contributed to rising house prices in the region, UBS said.

While unemployment across much of Europe remains in the double digits, the locals are now faced with a double whammy of not only having no income, but even if they do, being unable to afford a home. 

“All European cities are overvalued, apart from Milan,” the report said. Central banks in the U.K., Canada and Australia are also keeping interest rates low. Combined with stable supply of homes and strong demand from foreign buyers, especially in China, “this has produced an ideal setting for excesses in house prices,” the authors said, adding that price-growth deceleration in New York City a "sign of weakness of the financial sector."

Meanwhile, Vancouver house prices have been significantly overvalued since 2007, according to UBS. The culprit there is not so much the BOC as the PBOC: until recently Vancouver served as the primary offshore target for Chinese money launderers, which neither the financial crisis nor weakening commodity prices managed to dent. However, this bubble now appears to have finally burst after the provincial government of British Columbia introduced a 15% transfer tax on foreign home buyers in August, leading to a crash in the most expensive local housing segments.

As for other housing markets, UBS said that in London, an acute housing shortage and readily-available mortgages “should be able to sustain the inflated prices for the time being,” the report said.

According to UBS it is impossible to predict what might pop the bubbles, and when, even in cities with the clearest signs of a problem, UBS said. “A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time,” Holzhey said. Additionally, a change in “macroeconomic momentum”, investor sentiment, or major supply increase may trigger a “rapid price decline.”

Finally, there was some good news for Chicago residents: UBS found that the Chicago housing market remains undervalued “relative to its own history." However, considering the daily shooting spree that takes place in that city, it is probably not a big surprise.

UBS concludes that investors now buying cities considered overvalued “should not expect real price appreciation in the medium to long run,” UBS said.

That said, with every other asset class similarly overvalued, it is difficult to make a case in what other asset classes the nearly $2.5 trillion in record new liquidity created by central banks every year will see safer returns.