• UBS’s annual real estate bubble index determines overvalued global cities.
  • US house prices accelerated 7% over the past year, while financing costs fell.
  • UBS lists 3 reasons to worry about a bubble and 5 cities where property is overvalued.

The real estate market could be entering bubble territory as global house prices continue to rise, according to a new report by UBS.

The Swiss bank interpolated data from price, rent, and income indexes for five US cities. All five were deemed to be overvalued in terms of property prices.

“A long, lean spell for cities’ housing markets looks more and more probable,” said Claudio Saputelli and Matthias Holzhey, UBS’s heads of global and Swiss real estate, respectively. “In light of the shaky housing market fundamentals, caution is warranted.”

Saputelli and Holzhey said that three factors are stoking bubble fears.

First, US house prices surged 7% over the past year, meaning that there is worsening affordability in the property market. UBS said that Covid-19 had contributed to this trend.

“The coronavirus pandemic has trapped many people within the confines of their own four walls, amplifying the importance of living space and leading to a higher willingness to pay for housing,” Saputelli and Holzhey said. House prices fell in just four of the 25 global cities that they surveyed for the report.

Second, mortgage lending could be becoming unsustainable. Central banks have responded to the pandemic by cutting interest rates, making financing conditions more favourable.

“For most households, creditworthiness is the main barrier to entering the property market,” Saputelli and Holzhey said. “Once that obstacle is cleared, the low user cost of owning property compared with renting, coupled with the expectation of ever-growing house prices, makes homeownership look attractive regardless of price levels and leverage.”

Finally, prices and rents are decoupling. While house prices surged over the past year, rents in urban areas fell as remote working enabled many Americans to move away from cities. Average rent in New York and San Francisco fell by 20%.

“Pandemic-related restrictions and the rise of remote working have weakened the case for urban housing,” UBS’s research team said. “Rents in the cities analyzed have declined on average — something that happened rarely in the past.”

Saputelli and Holzhey said that the co-existence of high house prices and favourable financing conditions had been an indicator for previous housing crises — such as the 2008 property market crash.

“Worsening affordability, unsustainable mortgage lending, and a rising divergence between prices and rents have historically served as forerunners of housing crises,” they said. “Ever-higher prices and leverage imply ever-higher risks, a spiraling path that will likely prove a dead end in the long term.”

In addition to examining the potential real-estate bubble, UBS assessed five US urban areas where property is currently overvalued. Those five cities are listed below.



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