A basic demand and supply curve in the housing market is responsible for the markets and numbers reflected in the Global Real Estate Bubble Index. The availability of ample options due to an increased demand, eventually leading to decreased demand and more supply has shaken many markets in the recent past and continue to do so.
According to a report, which focusses on 20 major cities across the world, Hong Kong has the most overvalued houses, directly implying a major risk of collapse. The other cities that the Global Real Estate Bubble Index puts on the radar along with Hong Kong are Amsterdam, London, Munich, Vancouver and Toronto.
Sydney, Paris, Stockholm, Frankfurt and San Francisco also have issues that make them vulnerable to be a part of the residential bubble. Other cities which are deemed overvalued include New York, Los Angeles, Geneva, Zurich and Tokyo. Apart from this, Chicago is the one and only market that is considered undervalued.
The USB repost also highlighted that the markets have witnessed an overall 35 per cent average increase in the prices in the last 5 years. The price bubbles have been identified as a recurring phenomenon, giving them the definition, “a substantial and sustained mispricing of an asset.” Decoupling of prices from local incomes and rents, excessive construction or bank lending are typical signs of real estate bubbles.
Presenting his views on the same, Mark Haefele, chief investment officer at UBS Global Wealth Management, said, “Although many financial centers remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions.”
Hong Kong, the city that has been at the top in the bubble category, has witnessed an increase in prices by 10 per cent annually since 2012. UBS has also named Vancouver and Toronto, and higher stamp duties on foreign buyers have not really impacted the price boom. Although there has been no effect in Vancouver, slight changes in the Toronto property market are visible.
Boston and Chicago valuation remained low in fair-valued and undervalued category respectively, and NY, LA and San Francisco came under the overvalued segment.
Considering Europe, London’s score also declined for the second time continuously. Strained affordability, political uncertainty, increased taxes and Brexit have led to investors taking a backseat, thus bringing the housing market in UK to a halt.