The risk of housing bubbles globally has significantly decreased in 2023, primarily due to the impact of rising interest rates, according to a report released last week by Swiss bank UBS. The report revealed that out of 25 cities surveyed, only Zurich and Tokyo were at risk of a housing bubble this year, a substantial drop from nine cities in each of the two previous reports.
UBS identified the end of cheap financing in the real estate sector, attributed to increased interest rates, as the primary factor driving this change. Inflation-adjusted international home prices saw the most significant decrease since the 2008 global financial crisis. High-priced markets, previously considered unaffordable, faced added pressure from increased interest and slumped as a result.
Cities such as Tel Aviv, Hong Kong, Frankfurt, and Toronto, known for their chronically high housing prices, have exited bubble territory and are now merely classified as overpriced. However, Zurich and Tokyo remain in the housing bubble risk zone. Analysts believe that the Swiss market has not fully adapted to the new conditions yet, as seen in the unchanged risk level of Geneva. The market in Japan's capital is considered generally defensive or resistant to change due to central bank interest rates not rising in the country.
In the U.S., Miami remained the highest-ranked city with a score of 1.38, just 0.13 index points below bubble risk territory. The city saw only slight changes from 2022. New York and San Francisco have been newly included in the fair-valued category after experiencing Covid-19 and quality-of-life related deflators on top of pressure from interest. Los Angeles is viewed by UBS as overvalued but has become more affordable since last year.
The UBS report based its risk index on several factors including ratios of housing prices to rent and income, the increase in mortgage payments to the increase of GDP, the increase in construction spending to the increase of GDP, and the ratio of city housing prices to those in surrounding areas. Out of the 25 cities surveyed, all known for their high real estate prices, two were found to be in bubble risk territory. An additional 14 were considered to have an “overvalued housing market” and nine were now considered fair-valued, a new record for the ranking.
Over the past 18 months, central banks have aggressively hiked borrowing costs to combat inflation. This resulted in fewer housing-market bubbles as home prices are only severely overvalued in just two of the world's top 25 financial centers. House price growth has suffered due to rising financing costs as average mortgage rates have roughly tripled since 2021 in most markets.
In the U.S., the Federal Reserve has tightened by 525 basis points since March 2022, with the average 30-year fixed rate mortgage spiking from 4% to 7% over that timespan, according to data from the St Louis Fed. The U.S. was also the only country analyzed by UBS that didn't experience a sharp rise in rent prices over the past year.
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