Miami’s housing market, followed by Tokyo and Zurich, have the highest ‘bubble risk’ according to the 2024 UBS Global Research Bubble Index which analyses residential property prices in 25 major cities around the world.
The risk of housing bubbles in the cities analyzed have, on average, decreased for the second consecutive year with an elevated risk of a housing bubble evident in Los Angeles, Toronto, and Geneva.
Only a moderate risk was recorded in Amsterdam, Sydney, and Boston with Frankfurt, Munich, Tel Aviv, Hong Kong, Vancouver, Dubai, Singapore and Madrid in the same risk category after strong reductions in imbalances while Dubai recorded the strongest increase in the risk scores of all the cities analysed.
Low risk of a real estate bubble is evident in San Francisco, New York, and Sao Paulo. In Europe, following further declines in the index score, London, Paris, Stockholm and Milan also fell into the low-risk category. While bubble risk remains low in Warsaw, Sao Paulo shows the lowest bubble risk among the cities included in the index.
Inflation-adjusted housing prices in the cities analysed are now on average 15% lower than in mid-2022 when interest rates started to surge globally.
“The cities recording the strongest price corrections are those that displayed a high risk of a real estate bubble in previous years,” comments Claudio Saputelli, Head Real Estate at UBS Global Wealth Management’s Chief Investment Office.
Real prices in Frankfurt, Munich, Stockholm, Hong Kong, and Paris are below post-pandemic peaks by 20% or more. Vancouver, Toronto, and Amsterdam recorded sharp rice declines of around 10% in real terms.
Overall, the last four quarters were characterized by muted housing price growth, but strong corrections continued in Paris and Hong Kong. In contrast, in the sought-after locations of Dubai and Miami, housing prices surged further. In a few cities with pronounced housing shortages like Vancouver, Sydney, and Madrid, real prices increased by more than 5% compared to 2023.
On average, a skilled service-sector employee can afford 40% less living space than in 2021, before the rise in global interest rates. Current price levels seem far from sustainable at prevailing elevated interest rate levels—especially in markets with high homeownership rates. However, a significant deterioration in affordability does not necessarily cause a price correction.
An increasing housing shortage, reflected in rising rents, helped stabilize many urban housing markets. Real rents have increased by 5% on average over the last two years and have outpaced income growth in most cases. In most of the cities analyzed rental growth has even accelerated in the last four quarters. No relief is coming from the supply side, as high interest rates and increased building costs have weighed heavily on housing construction. Building permits have declined in most cities over the past two years.
The momentum in the housing market is set to improve. Rising rents underpin demand for home ownership in urban areas. Falling interest rates will shift the user-cost advantage sharply back to buying. First-time homebuyers would return to the market as affordability improves.
“Real housing prices in many cities have bottomed out. The economic outlook will likely determine whether prices once again surge or rather track sideways,” says Matthias Holzhey, lead author of the study at UBS Global Wealth Management.
