- The UBS Annual Real Estate Bubble Index identifies the world’s overvalued cities.
- US home prices have risen 7% over the past year, while funding costs have fallen.
- UBS lists 3 reasons to worry about the bubble and 5 cities where real estate is overpriced.
According to a new report from UBS, the housing market may enter a bubble as global home prices continue to rise.
A Swiss bank interpolated data from price, rent and income indices for five US cities. All five were found to be revalued in terms of property values.
“A long and lean period for urban housing markets looks more and more likely,” said Claudio Saputelli and Matthias Holji, heads of international and Swiss real estate at UBS, respectively. “In light of shaky housing fundamentals, caution should be exercised.”
Saputelli and Holji said three factors are fueling concerns about the bubbles.
First, home prices in the United States have risen by 7% over the past year, which means deterioration in availability in the real estate market. UBS said Covid-19 has contributed to this trend.
“The coronavirus pandemic has trapped many people in their own four walls, which has increased the importance of living space and led to a higher willingness to pay for housing,” Saputelli and Holji said. Housing prices fell in only four of the 25 global cities they surveyed for the report.
Second, mortgage credit lending may become unstable. Central banks have responded to the pandemic by lowering interest rates, making financing conditions more favorable.
“For most households, creditworthiness is the main obstacle to entering the real estate market,” said Saputelli and Holzhi. “Once that hurdle is removed, the low cost of ownership for users versus rent, coupled with the expectation of steadily rising home prices, will make home ownership attractive regardless of price levels and leverage.”
Finally, prices and rent are not linked… While home prices have risen over the past year, rents in urban areas have fallen as telecommuting has allowed many Americans to move out of cities. Average rents in New York and San Francisco fell 20%.
“The pandemic-related restrictions and growth in teleworking have weakened the case for urban housing,” said the UBS research group. “Rents in the analyzed cities have declined on average, which has rarely happened in the past.”
Saputelli and Holzhi said the coexistence of high house prices and favorable financing conditions was an indicator of previous housing crises, such as the 2008 real estate market crash.
“Worsening affordability, unsustainable mortgage lending and growing price-rent gaps have historically been the harbingers of housing crises,” they said. “Continuously higher prices and leverage imply increasingly higher risks, and this is a spiraling path that is likely to prove to be a dead end in the long run.”
In addition to examining a potential housing bubble, UBS has assessed five US metropolitan areas where real estate is currently overvalued. These five cities are listed below.