- A report by UBS analyzed price growth in 25 major urban housing markets around the world from the second quarter of 2019 through the second quarter of 2020.
- Of those markets, 7 are in bubble risk territory, per the UBS Global Real Estate Bubble Index.
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On a global scale, the housing market has shown strength during the coronavirus pandemic, despite the economic downturn.
A recent report by UBS identified three factors for its resilience.
First, as home prices are a backward-looking indicator of the economy, UBS said they therefore react with a delay to economic downturns. The number of transactions declined in most cities in the second quarter of 2020 compared with the previous year, "complicating price formation and reducing the validity of observed prices."
Second, the majority of potential home buyers didn't suffer direct income losses in the first half of 2020, UBS found. "Credit facilities for companies and short-time work schemes mitigated the fallout from the crisis, supporting employees' housing affordability."
And third, governments helped homeowners in many cities during the lockdown periods, with increased housing subsidies, lowered taxes, and suspension of foreclosure procedures.
The report analyzed annual house price growth rates in 25 major cities from 2001 through the second quarter of 2020. The markets in the study were Munich, Hong Kong, Zurich, Paris, Singapore, London, Geneva, Frankfurt, Stockholm, Vancouver, Milan, Toronto, Tel Aviv, Sydney, New York, Moscow, Amsterdam, Madrid, Tokyo, San Francisco, Los Angeles, Boston, Warsaw, Dubai, and Chicago.
In 21 of those cities, price growth accelerated over the past four quarters, a trend that USB has called unsustainable.
In fact, according to the UBS Global Real Estate Bubble Index, seven of the cities in the analysis are in bubble-risk territory.
Price growth rates recorded in the analysis are adjusted for inflation.
This is the first time that Zurich has made it onto the UBS Global Real Estate Bubble Index, the report said.
Home prices in the city are 50% higher than they were in 2010, per UBS. However, while there has been robust supple expansion, Zurich's owner-occupied market has slowed down.
"The coronavirus crisis has left hardly any traces on the owner occupied market. Housing located near the city center has even benefited from increasing demand over the last few quarters," the report reads.
"Currently, less than 0.5% of the stock of owner-occupied apartments is offered on the market, the lowest fraction nationwide," the report continues.
Looking ahead, UBS states that the recession has yet to fully impact the city and prospective buyers will move to sidelines, which will ultimately impact the high prices.
According to UBS, prices shot up in Amsterdam by more than 10% annually from 2013 to 2018, as demand outpaced supply. However, from mid-2019 to mid-2020, home prices slowed down and increased by just 4%.
Per the report, a lack of affordability and tightening mortgage criteria will likely "limit further upside of house prices for the time being."
In Paris, home prices have increased by nearly 30% since 2015, and by 6% over the past year.
According to UBS, the increase is a result of low mortgage rates and a growing demand in the luxury market from foreign investors.
"Housing affordability in Paris is very stretched, and a well skilled worker needs to work 16 years to save for a 60 square meter (650 square foot) flat — the second highest value of analyzed cities," the report reads.
Because of this, people have been leaving the city. A decrease in the city's population, per UBS, poses a threat to price stability.
4. Hong Kong
Per UBS, Hong Kong's housing market was on the upswing from 2003 to 2019 as a result of economic prosperity and high investment demand. However, a weakening economy put a pause on growing home prices, which are currently 5% lower than they were in mid-2019.
Despite the decline, UBS does not see home prices in Hong Kong correcting much further and sees a slight increase by the end of June 2021 as plausible.
To support this prediction, UBS points to Hong Kong's limited new construction, its history as "the key financial hub within the Greater Bay Area," people seeking citizenship there to avoid the global tax in China, and its low rate of foreclosures.
While Hong Kong ranked lower on the UBS Global Real Estate Bubble Index from mid-2019 to mid-2020, it still remains in the risk zone.
Per UBS, home prices in Toronto have doubled over the past 12 years as a result of population growth and low mortgage rates.
Over the past four quarters, home prices increased by nearly 6%. However, UBS states that there will be a "considerable" amount of new supply hitting the market in the coming quarters. In addition, the anticipated appreciation of the Canadian dollar will likely cool interest from foreign buyers.
Frankfurt has seen home prices double over the past decade. According to UBS, prices went up 8% from mid-2019 to mid-2020.
This strength in Frankfurt's housing market can be attributed to it being one of the biggest financial centers in Europe, strong economic and employment growth, and population growth.
These have resulted in growing rents and home prices, making the city unaffordable for many.
However, as UBS explains, with growth in employment halted, demand for housing in the city likely will as well. In order for home prices to remain stable, UBS said the city needs to see "sustained easy financing conditions."
Munich ranked number one on the UBS Global Real Estate Bubble Index, and poses the biggest bubble risk of the 25 cities included in the analysis.
Per UBS, this is the second year in a row Munich has topped the index. Over the past 10 years, rental prices in the city have increased by over 8% annually, the highest of any market in the analysis. The city also sports the highest price to rent ratio in the report.
The price growth can be attributed to a flourishing economy, a supply shortage paired with population growth, speculative investment demand, and "ever more attractive financing conditions."
However, UBS states that a correction could come if the city sees increased interest rates or tightening financial conditions.
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