Residential real estate: New global bubble index from UBS
Since 1998, real estate prices in many cities around the world have more than doubled in inflation-adjusted terms, and on average price levels are higher than before the financial crisis in 2007/08. In its new UBS Global Real Estate Bubble Index study, UBS Chief Investment Office Wealth Management concludes that residential real estate markets are overvalued in most of the cities surveyed. The risk of a real estate bubble is most pronounced in London and Hong Kong.
In Sydney, Vancouver, San Francisco and Amsterdam, deviations from the long-term norm indicate significantly overvalued residential real estate markets. Valuations are also excessive in Geneva, Zurich, Paris and Frankfurt. The same applies, albeit to a lesser degree, to Tokyo and Singapore. The US cities of New York and Boston have fair valuations by historical standards, while Chicago is undervalued.
The index measures the risk of a real estate bubble based on recurring patterns in selected global financial centers. The analysis is complemented by a comparison of the current ratio between purchase price and income or purchase price and rent level. Low affordability according to the price-to-income ratio suggests that the prospects for long-term price appreciation have diminished. In contrast, a high ratio of purchase price to rent indicates a dangerous dependence on low interest rates.
Zurich and Geneva are in the lower half of the "overvalued" range. At the end of 2011, Geneva was still rated "bubble risk". This is due to the fact that prices have fallen slightly, while incomes and rents have remained stable, UBS says. In addition, prices in other parts of the country have risen much more strongly, so that the differences in price levels have narrowed again somewhat.
Unlike Geneva, residential property prices in Zurich have risen by 30 percent since the end of the financial crisis. This is the second-highest growth rate of all the cities surveyed. Despite the overvaluation, an apartment in both Zurich and Geneva remains affordable by international standards. What is striking, however, is the record high ratio of purchase price to rent, reflecting the distorted interest rate environment, according to UBS CIO WM. (ah)
