A report from UBS finds that housing markets in 18 of 25 major cities around the globe are overvalued and seven of them are bloated enough to be considered a bubble risk.
All but two of the potential bubbles are in Europe, with Munich rated the riskiest, followed by Frankfurt, Toronto, Hong Kong, Paris, Amsterdam and Zurich.
The risk of a bubble in four of those seven cities has either remained the same or decreased since last year, according to the report. The risk increased in Frankfurt, Paris, and Zurich.
Residential prices have been climbing across much of the globe since the coronavirus pandemic briefly brought markets to a halt earlier this year, despite all indications that the global economy is headed toward a recession.
“Several puzzle pieces” had to fall into place for housing prices to avoid falling during the pandemic, according to UBS. That includes government support, low interest rates, and the easing of financing conditions.
“A correction phase will likely emerge when subsidies fade and pressure on income increases,” UBS said in the report.
The report includes an assessment of five U.S. cities. Los Angeles and San Francisco were found to be similarly overvalued, but the risk of a correction is low in L.A. so long as mortgage rates remain low and supply is constrained. Both factors have contributed to rising home prices since the pandemic. Falling prices in San Francisco since 2018 and low inventory reduce the risk of a bubble there.
New York is also considered slightly overvalued. UBS projects that the pandemic will have an “adverse impact on property values for the foreseeable future” because of the rise of remote working and municipal debt that could lead to higher taxes.
The bubble risk increased in Boston, but that market remains fair-valued, according to UBS. Chicago is considered undervalued.