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The most recent Global Real Estate Bubble Index, which assesses 25 major cities worldwide, indicates an average 5% decline in real house prices. This downward trend is expected to persist, with the report signaling significant price corrections, reducing the risk of a real estate bubble – a phenomenon that had a severe impact globally during the 2008 financial crisis.
Only Zurich and Tokyo are now classified in the “bubble risk” category, a decrease from nine cities the previous year. Cities like Frankfurt, Munich, and Amsterdam in Europe have shifted to the lower-risk “overvalued” category, joining others such as Geneva, London, Stockholm, and Paris.
Madrid, as per UBS, has also witnessed a reduction in property price imbalances, positioning it as “fairly valued,” aligning with the status of Milan and Warsaw.
A housing or real estate bubble arises when property prices experience a swift and unsustainable increase due to heightened demand and restricted supply. Eventually, demand stagnates or decreases abruptly, causing a sharp decline in prices, leading to the bursting of the bubble.
Due to Russia’s invasion of Ukraine and the impact of the COVID-19 pandemic, among other factors, real house prices in the 25 cities analysed by UBS experienced an average 5% decline from mid-2022 to mid-2023. UBS attributes the overall decrease in housing market imbalances to the prevailing economic conditions, marked by a global upswing in inflation and interest rates over the last two years. The bank suggests a likelihood of further price decline.
Frankfurt and Toronto witnessed the most significant drops, both experiencing a 15% decline, contrasting with their high-risk scores in the previous UBS report. Currently, only Zurich and Tokyo are identified as at risk of a real estate bubble, with Zurich showing continued but slower growth in real home prices throughout 2023, accompanied by a sharp acceleration in rental growth surpassing house price increases.
The bank stated that with the supply of available housing returning to pre-pandemic levels amid increasing financing costs, there is no anticipation of additional price gains.
Although cities like Paris and London have undergone price corrections and exhibit a lower bubble risk compared to Zurich, the decline in prices have not been substantial enough to notably enhance housing affordability, as per UBS. The bank highlights the ongoing disparity between property prices and wages in Paris and London, emphasizing that purchasing a 60 square meter home still equates to 10 years’ worth of annual salary for a qualified service sector employee.
Given this disparity, UBS predicts that prices are likely to continue decreasing if interest rates persist at their current high levels, even though there could be a potential recovery in the shortage of housing units.
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