Real property prices in many global cities doubled since 1998
Real — inflation-adjusted — property prices in many global cities have doubled since 1998. On average, they are higher than before the 2007-08 financial crisis. The risk of a residential property bubble is most distinct in London and Hong Kong.
“House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60 square-metre apartment exceeds the budget of most people who work even in the highly skilled service sector,” UBS said.
UBS Chief Investment Office Wealth Management's Global Real Estate Bubble Index, which was launched Thursday, shows that housing markets in most cities studied are overvalued.
Deviations from the long-term norm point to significantly overvalued 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, said: "A mix of optimistic expectations, favourable 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," Saputelli added.
Housing prices in Hong Kong are 60% above the 2006 level, and almost 200% higher than 2003, when the market troughed after the 1997-98 Asian financial crisis.
The average London house price was close to £500,000 in September , a 10% increase from a year earlier, according to the Land Registry. UBS says:
Average real dwelling prices have soared by almost 40% since the beginning of 2013, more than offsetting all losses triggered by the financial crisis. The increase has made London one of the most expensive cities in the world based on price-to-income and price-to-rent ratios that have surged to all-time highs. It takes a skilled service-sector worker approximately 14 years of average earnings to be able to buy a 60 sq m dwelling; the expense of buying a flat is comparable to renting it for 30 years.
According to the UBS Global Real Estate Bubble Index, the London housing market is in bubble-risk territory with a score of 1.88 and the report says that between 1985 and 2009, whenever the index exceeded 1.0 “a real price correction of on average 30% began within three years 95% of the time.”
In Hong Kong, the standard 60 square-metre apartment costs 21 times income to buy, and the average yearly income of a highly skilled worker can buy only around 3 sq m of living space.
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, said: "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."