UBS Wealth Management Launches UBS Global Real Estate Bubble Index

With copious amounts of ‘cheap money’ looking for a home, prime property in the world’s global capitals has been sucking in substantial sums. Real estate prices in many global cities have doubled since 1998 in real terms. On average, they are higher than before the 2007-08 financial crisis.

UBS Chief Investment Office Wealth Management's Global Real Estate Bubble Index, which launched yesterday, finds that housing markets in most cities studied are overvalued, with the risk of a residential property bubble most distinct in London and Hong Kong.

Deviations from the long-term norm point to significantly overvalued includes housing markets in Sydney, Vancouver, San Francisco and Amsterdam. Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore. The US cities of New York and Boston are fair-valued relative to their own history, while Chicago is undervalued.

Claudio Saputelli, Head Global Real Estate in UBS CIO WM, says: "A mix of optimistic expectations, favorable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow."

The term bubble refers to a substantial and sustained mispricing of an asset. A bubble cannot be proven conclusively unless it bursts, but recurring patterns of property market excesses are observable in the historical data. "It is essential to identify the signs of a bubble early on – that's why we have launched the UBS Global Real Estate Bubble Index," Saputelli states.

How to identify a bubble:

The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns in select global financial centers. The index uses the following risk-based classifications: depressed, undervalued, fair-valued, overvalued and bubble risk.

The analysis is complemented by a comparison of current price-to-income (PI) and price-to-rent (PR) ratios. Low affordability indicated by the PI ratio points to diminished long-term price appreciation prospects, while high PR multiples indicate a dangerous dependence on low interest rates.

Matthias Holzhey, economist at UBS CIO WM, says: "House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly skilled service sector."


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