Real estate bubbles of the world - February 25, 2018

Real estate bubbles of the world

Which cities have the most overpriced real estates? UBS’ Global Real Estate Bubble Index is designed to show that, and they just published their annual findings for 2017. So which global financial centre tops their list? The answer may surprise you!

Switzerland based UBS just published their Global Real Estate Bubble Index, which tracks housing bubbles in the world’s financial centres. But UBS not only shows the places with the biggest bubble risks, they also list fairly valued and undervalued cities as well.

Cities with the highest risks

“Bubble risk seems greatest in Toronto, where it has increased significantly in the last year” – writes UBS about the „winner” of the city having the highest risk of them all. Other global centres like London, Stockholm, Hong Kong and Sydney also have high bubble risks. Other centres like Paris, Tokyo are unsurprisingly overvalued, but they don’t have a bubble risk just yet. Unexpectedly, however, UBS found that cities that are considered very expensive (like New York and Singapore) are fairly valued.

UBS also has another way of measuring prices of cities: they compare the price of a 60m2 apartment to the annual income of residents. They found that buying said housing “exceeds the budget of people who earn the average annual income in the highly skilled service sector in most world cities”. They believe that “unaffordable housing is often a sign of strong investment demand from abroad, tight zoning and rental market regulations.”

Why is this important?

In the editorial part of their paper, leaders of UBS wrote that in several cities “prices rose more than 10% in the last year alone. Annual price-increase rates of 10% correspond to a doubling of house prices every seven years, which is not sustainable.”

They also add a very important note to this: “Vastly overvalued housing markets, as measured by the UBS Global Real Estate Bubble Index, have historically been associated with a significantly heightened probability of correction and greater downside than housing markets whose prices developed more in line with the local economy”. This means that when a select housing market becomes overpriced and bubble risks are too high, there is a great chance of correction.

Is real estate a good investment?

This leads us to the good old question: is real estate really the best investment? We gave our answer to that a while back, and our findings still prevail. Real estates can be good, but they need constant investment to fight amortization. They can also be hard to sell at a good price since they have low liquidity, especially at the time of a market correction.

A while ago another study found that stock might be better than real estate for the everyday investor. When we wrote about “Why the richest are getting richer” we quoted a Swedish paper that found that “there’s one big reason why the rich still come out ahead – instead of stocks, the middle class puts a large share of its wealth into residential real estate. Houses tend to earn lower returns than stocks.” Another paper in the meanwhile found that “at the collapse of the housing bubble exacerbated wealth inequality, because stocks recovered more strongly than real estate did”.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.