Three 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 few short years makes, because in the latest report by UBS Sealth Management which compiles the bank's Global Real Estate Bubble Index, it found that six of the world's largest cities are now subject to a massive speculative housing bubble. And while still unnaturally low mortgage rates are to blame for the rapid ascent of home prices, investors and offshore money laundering operators - especially in Canada - continue to play a role, as their favorite markets of Vancouver, Toronto and Hong Kong all made this year's list.
Bubble risk appears greatest in Hong Kong, Munich, Toronto, Vancouver, London and Amsterdam. Major imbalances also characterize Stockholm, Paris, San Francisco, Frankfurt and Sydney.
This year's study highlights increasingly strained affordability. Buying a small apartment in most world cities exceeds the budget of most people who earn the average annual income paid in the highly skilled service sector.
Prices continue to soar, but in half of the cities in the study, housing markets are booming with inflation-adjusted prices rising at least 5% in the last four quarters. However, in the other half of the cities house prices were stalling or declining.
According to UBS - if not Ben Bernanke - the typical signs of a housing bubble include real estate prices rising out of sync with incomes, as well as economic imbalances like excessive lending and construction activity. However, unlike the boom of the mid-2000s, there’s no evidence of simultaneous excesses in lending and construction, the report said, and outstanding mortgage volumes are growing at about half of the rate of the pre-crisis period.
"Although many financial centers remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a statement.
That will hardly comfort all those millions of residents in the bubble cities who continues to find themselves priced out of the market. That said, there was some good news: while housing bubbles are still pervasive, the rate of price increases is slowing:
Inflation-adjusted city prices increased by 3.5% on average over the last four quarters, considerably less than in previous years but still above the 10-year average. They remained on an explosive uptrend in the largest Eurozone economic centers, as well as in Hong Kong or Vancouver. But the first cracks in the boom’s foundation have begun appearing: house prices declined in half of last year’s bubble risk cities.
As UBS warns, fewer and fewer resident households can afford to buy their own home. The crowding out of long-time residents from their local housing markets by foreign investors is triggering political reactions. This is observed most directly in Canada, Australia and New Zealand where recent regulations have emerged making it difficult for foreign buyers to snap up local real estate.
Foreign and buy-to-let investors are the main group being targeted by new regulatory measures. It is becoming more difficult, more expensive and in some cases outright impossible for them to acquire residential space. Especially in the luxury market, regulatory intervention can bring demand to a standstill and trigger a price correction.
So if not regular people then who is buying up the real estate? Answer: investors, who have outperformed stocks by buying housing and renting it back out.
Over the past five years, owner-occupied homes have been a good investment: the median total return of the most important financial centers was 10% annually, accounting for an imputed rental income and book profits from rising prices. So “golden concrete” has seemingly outperformed the stock markets.
According to UBS, Chicago was the only undervalued housing market in the 20-city index, while Milan, Singapore and Boston are deemed fairly valued. Ten cities, from New York to Sydney to Stockholm, are overvalued, while six are in bubble-risk territory, with Hong Kong’s market the most inflated. Still, some questions about the methodology linger: just a year ago, New York had been scored as fairly valued (it is now seen as "overvalued").
As UBS further notes, last year the house price boom in key cities was already losing intensity and scope. Inflation-adjusted prices declined in almost half of the cities analyzed, which prompted UBS to warn that returns of owner-occupied homes in the next few years is questionable.
Yet while home prices may not be rising quite as fast as in recent years, houses in these cities remain out of reach for most ordinary homebuyers as prices in major cities have increased by 35% on average in the last 5 years:
Over the course of the last five years, house prices in major cities have increased by 35% on average. In San Francisco, Munich and Vancouver price growth was double the average. Overall, the price boom has not been spectacular, but it has been broad-based. Until recently nearly all the cities enjoyed rising house prices, something seen in the late 1980s and before the 2008 market crash. This exceptional breadth of the current house price boom has various roots. Easy financing conditions boosted demand almost everywhere. Major cities profited from the growing importance of the digital economy and the wider trend toward urbanization. Finally, the number of wealthy households searching for safe assets in the most attractive residential areas surged.
Why are most housing market inaccessible to mere mortals? Simple: incomes aren’t climbing fast enough to keep up with the price appreciation in many areas. For example, it would take a skilled service worker in Hong Kong 22 years of their average annual income to buy a 60-square-meter (650-square-foot) apartment near the city center. A decade ago it was 12 years.
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...