Prices in major housing markets are 'overvalued and out of sync with interest rates'

Toronto and Frankfurt are exhibiting 'price bubble characteristics' but Dubai remains fairly valued despite sharp rebound this year, UBS says

The Dubai skyline. UBS said the emirate's property market is not in the bubble-risk category. AFP

Property prices in major global metropolitan housing markets are highly elevated and out of sync with rising interest rates, although Dubai, despite a sharp recovery in recent quarters, remains fairly valued.

Imbalances are on the rise across markets, with Toronto and Frankfurt exhibiting pronounced “price bubble characteristics”, Switzerland-based UBS said in its Global Real Estate Bubble Index report on Thursday.

The investment bank, which analysed residential property prices in 25 major cities around the world in its annual survey, said the nominal house price grew at an average of 10 per cent during the 12-month period until the middle of 2022, the highest yearly growth rate since 2007.

Risks are also elevated in Zurich, Munich, Hong Kong, Vancouver, Amsterdam, Tel Aviv and Tokyo, as “the global housing boom is coming to an end”, according to the report.

“Inflation and asset losses due to [the] current turmoil in the financial markets are reducing household purchasing power, which curbs demand for additional living space,” said Claudio Saputelli, head of real estate at UBS Global Wealth Management.

“Housing is, thus, also becoming less attractive as an investment as borrowing costs in many cities increasingly exceed the yields of buy-to-let investments.”

The still robust labour market is the last pillar of support for the “owner-occupied” housing market in most cities surveyed. However, with a deterioration of economic conditions, it is also at risk of faltering.

“We are witnessing the owner-occupied housing boom finally under pressure globally, and in a majority of the highly valued cities, significant price corrections are to be expected in the coming quarters,” said Matthias Holzhey, lead author of the study at UBS Global Wealth Management.

In the US, all five markets analysed by UBS are in overvalued territory, with the imbalances more pronounced in Miami and Los Angeles than in San Francisco, Boston and New York.

Housing markets in Stockholm, Paris and Sydney remain overvalued despite some cooling trends. Signs of overvaluation have also persisted in Geneva, London, Madrid and Singapore.

However, the market in Dubai is fairly valued, along with that of Sao Paulo, Milan and Warsaw, the report said.

While prices are still on the rise in Dubai, the emirate’s property market is not in the bubble-risk category, UBS said.

Dubai's property market has picked up pace this year as the emirate's economy continues to gather momentum after a strong recovery from coronavirus-induced headwinds last year.

Sales of off-plan and secondary properties in Dubai reached a 12-year high in the third quarter, both in terms of volume and value, according to Property Finder.

Average prices for residential properties in the emirate rose by 8.9 per cent in 12 months to the end of September, with average apartment prices increasing 8 per cent and villas recording a more than 14 per cent jump, CBRE said in a report on Thursday.

Globally, home prices have diverged from incomes and rents over the past decade amid a lower interest rate environment.

Cities in UBS’ bubble-risk territory have reported average price increases of 60 per cent in inflation-adjusted terms during this period, while real incomes and rents have increased by only about 12 per cent.

Mortgage rates have almost doubled on average across all cities analysed since their lowest point in mid-2021.

An acceleration in the growth of outstanding mortgages was also evident in virtually all cities, and for the second year in a row, household debt grew significantly faster than the long-term average, UBS said.

“Combined with notably increased real estate prices, the amount of living space that is financially affordable for a highly-skilled service worker is, on average, one third lower than it was right before the pandemic,” the bank said.