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The top 20 cities in property bubble territory

Research from UBS Wealth reveals which global city is looking the most bubbly

The boom in global real estate only accelerated last year as almost a decade of ultra-easy central bank policy and footloose emerging market capital found a home in bricks and mortar.

There has been a marked hand off from the first generation of hot locations to a new tier of emergent global cities however, as markets in New York and London reached the limits of pricing.

Rather than identify the world’s most expensive cities, UBS has compiled an index value for each of the globalised cities in the world where price inflation appears to have come adrift from a broad spectrum of economic fundamentals.

This allows it to create an index value of bubble risk with anything above 1.5 over heating, 0.5 to 1.5 overvalued, -05-0.5 fair value and anything blow that undervalued.   

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The boom in global real estate only accelerated last year as almost a decade of ultra-easy central bank policy and footloose emerging market capital found a home in bricks and mortar.

There has been a marked hand off from the first generation of hot locations to a new tier of emergent global cities however, as markets in New York and London reached the limits of pricing.

Rather than identify the world’s most expensive cities, UBS has compiled an index value for each of the globalised cities in the world where price inflation appears to have come adrift from a broad spectrum of economic fundamentals.

This allows it to create an index value of bubble risk with anything above 1.5 over heating, 0.5 to 1.5 overvalued, -05-0.5 fair value and anything blow that undervalued.   

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Toronto

UBS Index value: 2.12

Price growth accelerated last year and reached an excessive 20% year on year in the last quarter. Real prices have doubled in 13 years, while real rents have increased by only 5% and real income by less than 10%. A strengthening Canadian dollar and further interest rate hikes would end the party.

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Stockholm

UBS Index value: 2.01

In the last 10 years, real prices have climbed by 60%, more than twice as fast as incomes, chiefly due to favorable financing conditions. Price growth sputtered over the last four quarters to 5%, below the national average, yet market imbalances increased further. Rising mortgage debt and building investments confirm overvaluation signals.

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Munich

UBS Index value: 1.92

House prices remained on an explosive tra­jectory: in 2016 they again increased at double-digit rates against the backdrop of record-low vacancy. Real prices have risen 85% in the last 10 years and affordability continues to deteriorate. It takes a skilled service employee an all-time high of eight work years to buy a 60m2 flat.

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Vancouver

UBS Index value: 1.80

Price growth peaked in the middle of last year when real prices soared 25% year on year. In 2Q17 the growth slowed to 7%, falling below the country average. Income and rental growth were solid at 3% and 5% year on year respectively. So valuations were slightly dampened in recent quarters, but the market remains in the bubble-risk zone, harboring substantial downside and elevated correction risk.

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Sydney

UBS Index value: 1.80

All sub-indicators point unequivocally to elevated risk on the housing market. The dip in prices in 2015/16 proved short-lived. Real prices again shot up 12% in the last four quarters and are now 60% higher than in 2012. Incomes increased by a meagre 2% in inflation adjusted terms. Tax breaks and interest only loans are whitewashing the worsening affordability for the time being.

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London

UBS Index value: 1.77

London’s inflation-adjusted housing prices are almost 45% higher than five years ago and 15% higher than before the financial crisis a decade ago. But real income remains 10% lower than in 2007. The rise in house prices, however, has been decelerating since the UK referendum in June 2016, and real prices are 2% lower. The prime market now faces oversupply as increased stamp duties on luxury and buy-to-let properties hamper demand. As a consequence, sales prices and rents in the high-end segment have fallen in almost all London boroughs since mid-2016.

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Hong Kong

UBS Index value: 1.74

Residential market prices reached an all-time high in mid-year. Prices - especially for smaller dwellings - surged in the last four quarters. In real terms they are close to three times higher than in 2003, having increased at an average annual growth rate of 10%. Real rents rose in the same period by 3%, while incomes were unchanged. Real incomes have virtually stagnated in Hong Kong for many years. So housing is less affordable here than in any other city we considered, and the average living space per person amounts to only 14m2.

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Amsterdam

UBS Index value: 1.59

Since 2015 real prices have increased by 30% and the city has entered bubble-risk territory. The city’s housing market sharply decoupled from the weak countrywide housing market. Deviations from market fundamentals in the capital are, however, not extreme. Remarkably, income and rental growth have kept pace with price growth since 2008, limiting the downside risk.

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Paris

UBS Index value: 1.31

Between 1998 and 2011, real prices for housing almost tripled. After a correction of roughly 10%, prices have recovered almost fully in the last two years. The housing market looks increasingly overvalued again. An improving economic outlook boosted mortgage and housing demand in recent quarters, but the worst housing affordability in continental Europe limits upside.

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San Francisco

UBS Index value: 1.26

In the wake of the technology boom and buoyant foreign demand, real house prices have soared 65% since 2012. Price growth has slowed in recent quarters, but remain with 6% above the national average. Despite the thriving economy, average incomes have risen only 10% since 2012 and have not kept pace with house prices, worsening housing affordability further.

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Los Angeles

UBS Index value: 1.13

Since 2012 real housing prices have increased by 45%, while across the US the figure is just 23%. The prospering economy and demand from China are fuelling the boom and show no sign of decelerating. Prices, however, are still 20% below their 2006 peak. While income growth has escalated in the last two years, housing affordability is stretched and should slow price growth

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Zurich

UBS Index value: 1.08

The valuation of the residential market was stable over the past year. The Index points to a moderately overvalued housing market. Real prices rose 2% over the last four quarters, slightly faster than the countrywide average. But the current rate of price increase is half that of the city’s 10-year average.

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Frankfurt

UBS Index value: 0.92

House-price growth accelerated last year and outperformed the countrywide housing boom. Frankfurt exhibited the third-fastest house price appreciation of the European cities in this study last year. Demand is supported by a dynamic economic environment and a spirit of optimism (the narrative of ‘Brexit gains’). But affordability and price-to-rent multiples leave scope for more appreciation.

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Tokyo

UBS Index value: 0.9

The city’s housing market continues to decouple from the rest of the country’s. Since 2012 real prices in it are up 25%, while they are down 10% nationwide. Low interest rates are sustaining the local boom, but housing is becoming increasingly unaffordable as income growth lags behind. The expected long-term decline in population limits the upside.

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Geneva

UBS Index value: 0.83

Home prices seemed to have reached a bottom after a price correction of roughly 10% in real terms since 2012. This year the market is showing signs of recovery. Valuations are increasing again in line with re-emerging price growth. The price-to-income ratio is elevated in historical as well as absolute terms. The city exhibits the lowest affordability in Switzerland.

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Boston

UBS Index value: 0.45

House prices increased by 6% last year and are now 20% higher than in 2012. The regional economy and incomes are growing faster than the national average. Housing affordability remains good compared to other cities in the study. A 60m2 flat costs only four annual household incomes. As population growth remains vigorous and supply may be slowing, prices should continue to rise.

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Singapore

UBS Index value: 0.32

Prices and rents continued to decline for the sixth consecutive year. In real terms prices are 18% lower than in 2011 at the previous peak. The elevated supply of new homes between 2014 and 2016 and multiple rounds of restrictive government policies cooled the prop-erty market. Both factors are set to reverse. As a result of strong supply, vacancy rates have increased from 6% to 9% in the last three years. The elevated supply of new homes between 2014 and 2016 and multiple rounds of restrictive government policies cooled the prop-erty market. Both factors are set to reverse.

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New York

UBS Index value: 0.2

New York remains in fair-value territory. Over the last four quarters, real prices in the New York metropolitan area rose by less than 3% and are, in total, 10% higher than in 2013, when the market bottomed out. The pace of price growth is only the half the national average. New York City is already one of the most expensive and unaffordable markets in the world. Declining population growth and rising financing costs were already limiting housing demand in the region. Should financing costs continue to escalate, the strained affordability might dampen the outlook even more.

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Milan

UBS Index value: 0.09

Real housing prices remain some 30% below the 2007 level. Slow economic growth has continued to hamper a housing recovery. The latest data indicates an improving outlook and steady employment growth in Lombardy, which will support incomes. So we expect home prices to recover. The city exhibits the best affordability of all the European ones in the study.

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Chicago

UBS Index value: -0.66

Since 2012 prices have risen by 15% in real terms but remain 30% below their 2006 peak. Decreasing population, sluggish employment and lacklustre economic and income growth hinder the recovery of broad-based demand in the housing market. We expect price growth to lag behind the national average in the coming quarters.

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