Housing bubbles are a complex phenomenon and care must be taken when making such market definitions. Although we are already seeing a decline in deals and prices in some major markets, globally housing markets are gaining strength and prices are generally rising. Whether such a market is overvalued and awash in speculation, or simply enjoys strong demand, remains a matter of debate.
Of course, once the bubble bursts, everything becomes obvious.
A common warning sign of an inflating bubble is when property prices significantly exceed local incomes and rents. Excessive construction activity and lending may signal a future bubble inflation.
The Real Estate Bubble Index chart from UBS looks at 25 cities worldwide and assesses the possibility of a bubble.
Several housing markets that cracked after the rate hike
Some major markets are already witnessing a decline in property prices
In 2022, the index reports that nine of the listed cities are classified in the category of extreme bubble risk (1.5 or higher score).
Canada’s largest city finds itself at the top of a ranking that no city wants to be in. Housing prices in Toronto have been rising fairly steadily for years and many, including UBS, believe the city’s housing market is the victim of a bubble.
I Vancouver is in a similar position. Both Canadian cities boast a high quality of life and have thriving technology industries.
Among European cities, there is a greater risk of a property bubble in Amsterdam, Frankfurt, Munich.
Strikingly, none of the US cities analyzed fall into the “highest bubble risk” category. Miami is close to that line, but has yet to cross it.
In fact, the rise in US housing prices has ended as well reported a decline for the first time in ten years.
The national S&P CoreLogic Case-Shiller index of prices in 20 major cities in the country was down 0.44% in July. This is the first decline since March 2012. In July, declines were reported in San Francisco (-3.6%), Seattle (-2.5%) and San Diego (-2%).
Cities in the bubble risk zone have seen prices increase by an average of 60% adjusted for inflation over the past decade, while rents and real incomes have increased by just 12%.
It is an interesting case on a global scale Hong Kong, which experienced the largest one-year nominal price decline of all the cities analyzed. The report notes that since around 2019, Hong Kong has “generally stagnated, due to the lack of affordability, economic problems and restrictions that have dampened demand”.
Prices can’t go up forever. According to UBS, most cities with high ratings, price corrections have already started or are coming.