“Price bubble” in the real estate market: what is it and which cities does it threaten?

Compared to last year, there has been an increase in the number of countries and cities in the world in which housing prices are growing much faster than initially expected, and stand out noticeably against the general background. The new rating of the Swiss financial holding UBS shows where the risk of a so-called “price bubble” is high in the foreseeable future.

Such a phenomenon as a “bubble” in the real estate market consists of an overvaluation of objects over a fairly long period of time. As a rule, it arises due to a shortage of supply, which leads to unreasonable excitement and further rise in price. However, there are also examples of a different kind – in particular, the formation of a “bubble” in Spain in 2007, when supply significantly exceeded demand (primarily on the eastern and southeastern coasts of the country), and as a result a “stock” of unsold and even still unfinished objects.

The main signs of such “bubbles” are the discrepancy between prices in local real estate markets and real incomes and rental rates, excessive construction and mortgage lending, although investor sentiment also plays an important role. At a certain point, sales volumes plummet, dragging prices down with them, and those who invested in housing with an eye to the future find themselves losing.

Real estate bubble

In order to identify cities with the greatest risk of bubbles, UBS experts studied local real estate markets between mid-2020 and mid-2021. They were based on how long a qualified specialist would have to work in order to purchase an apartment with an area of ​​60 sq.m. not far from the center, and how many times its purchase will cost more than long-term rent.

As it turned out, significant inflation-adjusted price increases occurred in all 25 metropolitan areas studied except New York, San Francisco, Milan and Paris and were the largest since 2014. With an average growth of 6%, the leaders in this indicator were Moscow (21%), Stockholm (17%) and Sydney (14%); things were little better in Tokyo, Vancouver and Toronto.

This is due to a number of circumstances, the first of which is the Covid-19 pandemic. Due to the threat of the spread of coronavirus infection, investors began to give preference to large houses and apartments with spacious terraces or garden plots, located away from large gatherings of people. The transition of many companies to remote work and the reduction of shopping and entertainment opportunities also contributed to the outflow of personnel from large populated areas. In this regard, for the first time since the early 90s, housing prices in the suburbs and satellite cities began to grow faster than in megacities. Additional factors included low interest rates on mortgage loans and a tendency to increase savings that had nothing to spend on.

As a result, by the fall of 2021, several “risk zones” had formed in the world. Among the European cities, in addition to those already listed earlier, they include Zurich, Geneva, Frankfurt, Munich, Amsterdam, Warsaw, Milan and Madrid. The real estate markets of the latter two suffered significantly due to overly strict quarantine measures, which sharply slowed down the economic recovery.

The Covid-19 pandemic has also had a significant impact on the London property market, which continues to look overvalued, despite price growth still lagging behind the national average. Due to the popularization of remote work, demand has shifted towards houses and apartments located outside the city center.

Finally, in Asia and the Middle East, rising house prices had different reasons. In Tel Aviv, it was driven by a reduction in mortgage rates and taxes on the purchase of secondary real estate in Israel, in Tokyo by population growth and attractive bank financing conditions, and in Dubai by an increase in oil prices and simplification of mortgage lending rules. The only metropolis in which there is a risk of a “bubble”, despite price stability, is Hong Kong.

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