UBS Global Real estate
Comment of the Day

November 04 2021

Commentary by Eoin Treacy

UBS Global Real estate

Thanks to a subscriber for this report from UBS which may be of interest. Here is a section:

Frankfurt, Toronto, and Hong Kong top this year’s UBS Global Real Estate Bubble Index, with the three cities warranting the most pronounced bubble risk assessments in housing markets among those analyzed. Risk is also elevated in Munich and Zurich; Vancouver and Stockholm both reentered the bubble risk zone. Amsterdam and Paris round out the cities with bubble risk. All US cities evaluated— Miami (replacing Chicago in the index this year), Los Angeles, San Francisco, Boston, and New York— are in overvalued territory. Housing market imbalances are also high in Tokyo, Sydney, Geneva, London, Moscow, Tel Aviv, and Singapore, while Madrid, Milan, and Warsaw remain fairly valued. Dubai is the only undervalued market and the only one to be classified in a lower category than last year. On average, bubble risk has increased during the last year, as has the potential severity of a price correction in many cities tracked by the index.

Hot but likely short-lived fireworks
House price growth in the cities analyzed accelerated to 6% in inflation-adjusted terms from mid2020 to mid-2021, the highest increase since 2014. All but four cities—Milan, Paris, New York, and San Francisco—saw their house prices increase. And double-digit growth was even recorded in five cities: Moscow; Stockholm; and the cities around the Pacific, Sydney, Tokyo, and Vancouver.

Eoin Treacy's view

Here is a link to the full report.

The methodology of taking the price of an apartment in the downtown area of a city is certainly convenient. However, for markets like Los Angeles, it does not fully reflect the dynamics of the market. There is no doubt that the price of apartments has risen significantly in the last decade, it is also true that some of the city’s cheapest pieces of real estate lie within a couple of miles of downtown. In fact, the further one gets from downtown the higher the price per square foot gets.

Nevertheless, for less geographically dispersed locations the message is clear. The price of property has been greatly enhanced by the long downtrend in interest rates and the bonus of massive liquidity injections since the pandemic panic of 2020. That should focus the attention of investors on the question of how realistic central bank plans for interest hikes really are.

Many commodity exporters and emerging markets are already raising rates. Japan and the EU will be among the last to raise rates and the USA is somewhere in between. The big question will remain about how persistent inflation is likely to be. Everything we have seen so far points to a lumpy suite of data points; where we tend to get sudden surges followed by declines that don’t quite unwind the advance, which are followed by price surges in other areas.

Government and central bank policy is ultimately based on consumer sentiment. Most people are in no mood to tolerate fiscal conservatism and instead are voting for more generous benefits and demanding wage hikes. The supply shortages, driven by manufacturing bottlenecks, unexpected demand surges and labour dislocations are contributing to the perception prices are running away from consumers. That’s going to pressure central banks to act but not so much as to derail the trend. It suggests negative real interest rates will be with us for the lengthy medium-term and that should help to support asset price appreciation even as leverage ratios increase.

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