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Bubble Index 2018 suggests risk appears greatest in Hong Kong

UBS Global Wealth Management’s Chief Investment Office have released The UBS Global Real Estate Bubble Index 2018, indicating ‘Bubble risk’ or a significant overvaluation of housing markets in most major developed market financial centres.

According to the report, ‘Bubble risk’ appears greatest in Hong Kong, followed by Munich, Toronto, Vancouver, London and Amsterdam. The study has also found imbalances in Stockholm, Paris, San Francisco, Frankfurt and Sydney. Valuations are stretched in Los Angeles, Zurich, Tokyo, Geneva and New York. By contrast, property markets in Boston, Singapore and Milan seem fairly valued while Chicago is undervalued.

Bubble risk increased in Munich, Amsterdam and Hong Kong over the last year. In Vancouver, San Francisco and Frankfurt, too, imbalances continued to grow. More broadly, index scores fell in no less than one-third of the cities. Stockholm and Sydney experienced the steepest drop and moved out of bubble risk territory. Valuations went down slightly in London, New York, Milan, Toronto and Geneva.

In contrast to the boom of the mid-2000s, however, no global evidence of simultaneous excesses in lending and construction exists. Outstanding mortgage volumes are growing half as fast as in the run-up to the financial crisis, limiting economic damage from any price correction.

“Although many financial centres remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.

“Nevertheless, investors should remain selective within housing markets in bubble risk territories such as Hong Kong, Toronto, and London.”

“The median total return on housing in the most important developed market financial centres was 10% annually over the past five years, accounting for an imputed rental income and book profits from rising prices,” said Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office.

“How appealing returns will be in the next few years is questionable. We recommend caution when buying residential real estate in most of the biggest developed market cities.”

In Asia, Hong Kong tops the Index in 2018. House prices have continued to increase by an annual rate of almost 10% since 2012. In Singapore inflation-adjusted prices staged a fulminant recovery in the last four quarters after six years of correction, rising by 9%. However, the city remains in fair-valued territory. Singapore is one of this study’s few cities whose affordability has improved over the past decade. See pages 9, 12, 16, and 19-20 of the report for further findings in Asia Pacific.

UBS Global Real Estate Bubble Index:

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