UBS Wealth Management has launched Global Real Estate Bubble Index to track the risk of housing bubbles in global financial centers.
The UBS Global Real Estate Bubble Index found real estate prices in many global cities have doubled since 1998 in real terms, with prices now largely higher than they were before the 2007-08 financial crisis.
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The report says that risk of a residential property bubble is most distinct in London and Hong Kong. The two cities, among 15 studied, face the greatest risk of overvalued prices.
Sydney, Vancouver, San Francisco and Amsterdam are also significantly overvalued based on long-term norms, says the report. Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore.
The report added that 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 Wealth Management, said: "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 added.
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."
