A price bubble is a significant and sustained mispricing of an asset, the existence of which cannot be established until the bubble collapses. Typical indicators include a decoupling of prices from local revenues and rents and real economy imbalances, such as excessive lending and construction activity.
Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv, whose imbalances had previously placed them in the bubble risk zone, are now in the overvalued region. Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney also have overpriced housing markets.
Stagnated prices in Geneva
By contrast to Zurich, real estate prices in Geneva are less than 20% higher than ten years ago. Between mid-2022 and mid-2023, real prices stagnated. The risk score is far lower than in 2013.
At that time, the market was in bubble-risk territory. However, new building permits are only about half their 10-year average, supporting price levels in the medium term.
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The most sought-after destinations in recent years are Singapore, Dubai, and Miami. In those hotspots of international demand, rental, and for-sale price growth clearly stand out. Prices are up as much as 40%, and rents are 50% higher than two years ago.
Warsaw as an Exemption to the Price Increase
The real estate price level in both German cities Frankfurt and Munich, doubled between 2012 and 2022. This was the strongest growth of all the cities included in the study. But the sharp rise in mortgage interest rates in Germany has abruptly ended that house price boom.
Adjusted for inflation, prices in Frankfurt have corrected by almost 20% since the end of 2021 and by 15% in Munich. According to the UBS Global Real Estate Bubble Index 2023, both cities have left the bubble risk zone but remain highly overvalued.
In Paris, falling mortgage rates and strong international demand were the main drivers of a 30% real house price increase between 2015 and 2020. The city became less affordable, and bigger flats for families were in short supply.
People left France’s capital city, rendering its population 5% lower than a decade ago. Prices started falling in 2021. The decline has accelerated in recent quarters as higher mortgage rates, lending restrictions, and a property tax hike dampened buyer activity.
Real estate prices in Warsaw increased by almost 40% between 2012 and 2022. The city attracted new citizens and buy-to-let investors alike. Strong employment prospects, a subway expansion, and modern housing developments kept the market attractive.
Zurich: Property as a concrete gold
At current higher financing costs, purchasing a home only pays off financially compared to renting if its market value increases in the long run. Buy-to-let investments have become unattractive. For the coming quarters, UBS does not expect to see any more price upside, contributing to lower imbalances.
A significant countrywide drop in building permits supports the perception of property as “concrete gold.” First, a persistently high share of money market financing suggests that many buyers expect interest rates to decrease again. Second, the market size of the owner-occupied housing segment is relatively small. And third, the city is seeing strong employment growth in well-paying industries.
