The Global Housing Bubble Is Biggest In These Cities

Two years ago, when UBS 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 just a couple of years makes, because in the latest report by UBS wealth Management, which compiles the bank's Global Real Estate Bubble Index, it found that eight of the world's largest cities are now subject to a massive speculative housing bubble.  And while perpetually low mortgage rates are clearly to blame for the rapid ascent of home prices, Chinese money laundering operations clearly seem to also be playing a role as their favorite markets of Vancouver, Toronto and Sydney all made this year's list.

Bubble risk seems greatest in Toronto, where it has increased significantly in the last year. Stockholm, Munich, Vancouver, Sydney, London and Hong Kong all remain in risk territory, with Amsterdam joining this group after being overvalued last year. Valuations are stretched in Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva as well. In contrast, property markets in Boston, Singapore, New York and Milan seem fairly valued, while Chicago remains undervalued, just as it was last year.

 

Price bubbles are a regularly recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. But recurring patterns of property market excesses are observable in the historical data. Typical signs include a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns.

As UBS points out, artificially low interest rates in Europe, for example, have kept mortgage payments below their 10-year average despite real prices surging 30% since 2007. 

Falling mortgage rates over the last decade have made buying a home vastly more attractive, which increased average willingness to pay for home ownership. In European cities, for example, the annual usage costs for apartments (mortgage interest payments and amortization) are still below their 10-year average, despite real prices escalating 30% since 2007. In Canada and Australia, too, a large part of the negative impact of higher purchase prices on affordability was cushioned by low mortgage rates.

 

The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level. The superstar narrative has received additional impetus in the last couple of years from a surge in international demand, especially from China, which has crowded out local buyers. An average price growth of almost 20% in the last three years has confirmed the expectations of even the most optimistic investors.

Of course, at some point even artificially low interest rates can't offset 10%-20% annual real home price increases, which imply a doubling of prices every 4-7 years.  

Annual price-increase rates of 10% correspond to a doubling of house prices every seven years, which is not sustainable. Nevertheless, the fear of missing out on further appreciation predominates among home buyers. After all, the price increases appear rational, for three reasons.

 

First, financing conditions in many cities are now more attractive than ever before. Second, the global increase in wealthy households seemingly creates constant demand for the most attractive residential areas. Third, building activity cannot keep pace with this demand.

 

Expectations tend to be prone to exaggerations in boom phases. The optimistic projections of the trends outlined above create ever-greater price fantasies. However, should sentiment change or interest rates increase, a correction is practically inevitable. In the past, rising interest rates almost always triggered a crash in housing markets. In addition, the dependence of prices on international flows of capital represents an incalculable risk. Plus, once demand fell, even the low growth in supply would no longer provide an anchor.

Meanwhile, the U.S. has managed to avoid UBS's bubble territory, and a repeat of the 2007 housing crisis, for now...even though markets like San Francisco and Los Angeles look set to give it another try...

Comments

Bigly Thu, 09/28/2017 - 20:07 Permalink

I am not a fan of SFO. I fail to see why values are so high. Not everyone works for goolag. The weather is not that great. Meh.

Krungle Bigly Thu, 09/28/2017 - 20:21 Permalink

SF gets almost the same amount of sunlight per year as San Diego (66% vs 68% sunny days), temperatures are pretty much constant 50 to 70 degrees with almost no freezes and very few days over 90. There are a few pockets that are prone to nasty winds off the water, but otherwise there's not really much to complain about there in terms of weather. There's lots of other reasons to dislike the place, but weather isn't one of them.

In reply to by Bigly

Endgame Napoleon Bigly Thu, 09/28/2017 - 21:29 Permalink

Some say it is because of too many people with high incomes concentrated in that area, competing for homes and bumping up prices with their ability to pay more.

It is sort of the opposite of labor markets where too many moms with spousal income or welfare and taxfare for out-of-wedlock reproduction compete for jobs, driving down wages due to the fact that their unearned income streams make it easy for them to accept low pay.

Some say the SV housing inflation is due to foreign real estate speculators and foreign tech workers, overvaluing modest homes that would seem more valuable in their home countries than they do to the eyes of Western buyers.

In reply to by Bigly

FrankDrakman Thu, 09/28/2017 - 20:16 Permalink

Both Vancouver and Toronto have cooled off significantly as the result of provincial governments levying non-resident real estate transaction taxes. Since there were rumours of both long before they were levied, I'm sure some of the last run up was a rush to beat the transaction tax. We'll see what happens. 

The Real Tony FX223 Thu, 09/28/2017 - 22:56 Permalink

Toronto is irrelevant all that matters is what happens to Richmond Hill, Markham, Unionville and Stouffville. Those 4 cities not Toronto show the direction of real estate in the entire GTA. Richmond Hill is always the first to move of the 4 cities. Richmond Hill is like the needle on a compass. Toronto means nothing the amount of Chinese money in Toronto percentage wise by race is low.

In reply to by FX223

OliverAnd FrankDrakman Fri, 09/29/2017 - 03:13 Permalink

Both cities have cooled off but home prices are still higher than they were last year(in prime downtown Toronto neighborhoods).  The housing market is too important for the Canadian economy for the government not to prevent it from collapsing.  The worst case scenario stagnation in prices next year.  Many here are hoping for 40-60% because they simply cannot even afford a garage.  They fail to realize that if such were to happen, society would collapse as this is the sector the Canadian economy depends on mostly; why would you want to buy in such an environment?  Torontonians wanted a world class city and so they are getting one; this means expensive everything from homes to bottle water.  You cannot have a world class city with rural Canadian prices.  Toronto and Vancouver still have a long way to go to catch up to the prices in London, New York, Paris, Hong Kong, etc.  I am sure the Chinese will find a way to still invest in Canada; one that comes to mind is to have their children 'invest' an x amount in order to get their permanent status and then begin buying homes once again.  The entire population of Canada is smaller than a Chinese village........    

In reply to by FrankDrakman

Sonny Brakes Thu, 09/28/2017 - 20:22 Permalink

Houses need continuous replacement over the lifetime of its mortgage so yes it does, over time, go up in value, but the number of people able to afford proper housing will continue to dwindle and the state will continue to tax people out of their homes.

Mazzy Sonny Brakes Thu, 09/28/2017 - 22:01 Permalink

The elitists want their own fiefdoms via rental properties.  They don't give a fuck if 90% of people are priced out as long as they can get their income stream.  Why would they want reform or any increase to actual supply?In times of olde you could at least gaze upon the hill toward the Baron's castle and figure out who literally owned your ass.  Today it's a bit harder, they are hidden behind tax policy and shell companies.  It was actually a little more honest when the Baron had to send a tax collector and a couple of knights door-to-door to take a chunk of your wealth.

In reply to by Sonny Brakes

Stormtrooper Thu, 09/28/2017 - 20:50 Permalink

END THE FED!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

yerfej Thu, 09/28/2017 - 21:39 Permalink

It will not matter if Toronto melts down as there is no one living there that is from this planet, they are all complete leftist zipper heads.

Mazzy Thu, 09/28/2017 - 21:56 Permalink

I don't give a fuck about housing prices in Jew York, Hong Dong, or San Fransissyco; I only care about my house on my street and the adjacent streets filled with very real and honest neighbors (yeah, even the slightly weird ones, but at least we're all net contributors and just want to be left alone).  

DPLETTENBERG Thu, 09/28/2017 - 22:32 Permalink

In reality we only rent our homes and property from the state. If you don't think so try not paying your property tax (rent) and watch how quick the state will repossess your property.

peterk Thu, 09/28/2017 - 22:48 Permalink

the sad thing is real estate prices  EFFECT peoples LIVES in every way.Real estate is a a place to live.Now they have commoditized it into a bubble., and this really impacts the economy in the long run as peoplecant afford to get married  an all that.It then changes consumers spending behaviour as a result.High prices as we know steals expendiure into more productive areas like opening a business etc. But i suppose none of that matters as long as the  FAT OLD FARTS who own properties are now asset richand suddenly are the most important members of their extended families....where as many years ago the oldieswere ignored!.Asset rich, income poor...its always the same story.All bubbles burst, but this one JUST DOESNT it seems. Only when i see EURODOLLAR rates spike up as they did last year, and importanly the JGB rise up which i considera leading indicator, will i say this bubble has burst in property.  

The Real Tony peterk Thu, 09/28/2017 - 23:12 Permalink

The worldwide real estate bubble will implode when all the Chinese go broke. The Chinese always buy highest and try to sell even higher. The Chinese are the creators of most of the modern day bubbles or ponzi's. They will all implode some day and then everyone except the Chinese will have money. Only then can the world rebuild itself.

In reply to by peterk

San Pedro Fri, 09/29/2017 - 00:49 Permalink

Property Flippers have greatly added to this "bubble" valuations horror. We need "owner occupancy"  requirements to assure "real home owners" are buying the properties rather then a flipper that not only contributes to "bubble valuations" but also runs up "property taxes" in "bubble" communities. 

Mission Canyon Fri, 09/29/2017 - 05:04 Permalink

Some pretty ugly ameteur geography in that second map, making it appear as if Stockholm, Sweden is 80° latitude, north of Norilsk, Russia in the Arctic Ocean.  Perhaps moving the town there would cut down on the rapefugee problem?  See if Russia will sell Sweden the un-nuked part of Novaya Zemlya.