6 Global Property Markets Facing Bubble Risk

Stained affordability of housing markets is often perceived as a sign of their success — that buyers and investors are willing to pay all it takes to own a piece of coveted real estate. However, over-valued property is telling of the problems a real estate market faces in present. It is also indicative of disasters in the making.

“High house prices are not a sign of city’s success, but a sign of failure to deliver the housing that its citizens need,” says German economist Oliver Hartwich, who is also the executive director of The New Zealand Initiative.

Worse still, great expectations about returns, grand capital infusion from foreigners and a liberal monetary policy are together seen giving birth to property markets that are more and more vulnerable to what is known as “bubble risk”.

The term bubble refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts, says the UBS Global Real Estate Bubble Index. The index gauges the risk of a property bubble on the basis of decoupling of prices from local incomes and rents and imbalances in the real economy, such as excessive lending and construction activity. A rating over 1.5 at the index is reflective of a bubble risk while a rating between 0.5 and 1.5 is indicative of over-valuation.  

In its 2018 edition, the index has listed six major housing markets that face this risk. Which are these markets?

Index score: 2.03

In this “chronically undersupplied” Asia market, property has become so wildly expensive over the years that ownership has become a distant dream even for those who earn twice the average national income.  One requires 22 years of their income to afford a 650-square-foot (sqft) flat here as against 12 years a decade back.

“Since 2008, prices have doubled (they continued to increase by an annual rate of almost 10 per cent since 2012) while rents have gone up by 15 per cent and incomes have remained unchanged in real terms," says the survey.

While indicating that a mild price correction is a possibility, the index says pent-up investor demand and low interest rates would keep pumping up the demand for Hong Kong realty. Increased regulatory intervention could only make matters worse.

Index score: 1.99

When compared to Hong Kong, a skilled worker would take much less time, eight year to be exact, to afford a 650-sqft house near Munch city centre. However, housing affordability in Munich has been deteriorating consistently, with prices doubling in the last decade and still continuing on an explosive trajectory. Nominal rents jumped nine per cent last year, reflecting record low vacancies, shows the index. A correction is likely if interest rates pick up at a time when construction activity has increased, it says further.

Index score: 1.95

Price dynamics have slowed considerably in this Canadian city starting the second half of 2017 after the government launched several measures that year, including higher taxes on foreign investors & vacant property and stricter rent control norms. Consequently, it would require a skilled worker six years income to buy a property near the city centre, the lowest among cities that are stating at a bubble risk.

That notwithstanding, property prices are still 50 per cent higher than they were five years ago. For the correction course to continue, the Canadian Dollar must stay strong, curbing demand from foreign investors, the index shows.

Index score: 1.92

Unlike Toronto, rates of property in this Canadian city increased in double digits causing major imbalance. Rates of property in Vancouver have in fact doubled in the past 12 years.  

“As the government tries to contain speculation, the tax burden is rising for high-end property buyers and foreign purchasers,” says the survey.

While stating that the imbalances are mitigated somewhat by income growth and above-average rental growth of 5–7 per cent over the last four quarters, the index says that the already strained affordability will become an acute issue if mortgage rates rise further. 

Index score: 1.65

Bubble risk soared in Amsterdam, where a skilled worker would now require 10 years of his income to afford a home. Prices have in fact soared 60 per cent higher than their 2013 level.

“The city’s housing price rise has more than doubled nationwide averages in the last five years. Given the highly strained affordability, a tightening of lending conditions might end the boom rather abruptly,” says the survey.

Index score: 1.61

For the second time, London’s index score declined on strained affordability, political uncertainties and unfavourable tax environment and falling prices. Rates have fallen five per cent since mid-2017. However, the time one would need to afford a property in this old city, 15 years that is, is shorter only than of Honk Kong. 

Housing continues to stay unaffordable for inflation-stricken Londoners because government scheme to benefit first-time homebuyers seem not to be working effectively in the UK capital. 

For investors from outside, this, however, is an opportunity. 

"From the perspective of foreign investors, house prices in dollar terms have fallen by 10 per cent since 2015, and could constitute an attractive buying opportunity," says the survey.