17 October, Casa.it
Milan is the city with the most convenient prices in Europe, while the risk of property bubble rises in many cities of developed countries.
The UBS Global Real Estate Bubble Index 2017 survey by UBS Wealth Management analyses the prices for residential properties in 20 metropolises around the world.
Toronto is the city most at risk of a property bubble, followed, in decreasing order, by Stockholm, Munich, Vancouver, Sydney, London, Hong Kong, and Amsterdam.
In Europe, Milan is the city with the most convenient prices compared to other financial cities for what concerns the property market. The risk of property bubble rises for Stockholm, Munich, and Amsterdam, while Frankfurt, Zurich, and Geneva have furtherly appreciated since 2016. London is still at risk, but not as much as last year.
The residential property market in the cities of the developed economies is still inflated and the number of cities at risk of property bubble has risen since 2016, according to the annual report by Global Real Estate Bubble Index by UBS Wealth Management.
Toronto, a new entry, is leading the chart for 2017. Same as 2016, Stockholm, Munich, Vancouver, Sydney, London and Hong Kong are still at risk. Amsterdam has added to the list starting from this year, while in the previous year the city was only slightly inflated.
According to the survey, Chicago is the only undervalued metropolis, while three-quarters of the cities around the world are risking a property bubble. In Europe, Milan is the most convenient. A qualified professional working in the service sector has to work on average only 5.7 years to afford a 60 Sq m apartment.
The real house prices remain about 30% below the 2007 levels. The slow growth of the economy has penalised the recovery of the residential property market. The recent figures, however, show an improvement and a consistent increase of occupation in the region of Lombardy with a positive effect on incomes.
UBS estimates that house prices are bound to rise. Meanwhile, in the rest of Europe, the situation is heating up. In the last three quarters, the UBS Global Real Estate Bubble Index has risen for all the city analysed.
Amsterdam, Frankfurt, and Munich have registered great increases. All the cities of the survey have appreciated, except for Milan.
Prices, net of inflation, are at their highest points ever in Munich, Amsterdam, and Stockholm. Prices are increasing also in Frankfurt. London is still at stake, but not as the city was just after the Brexit referendum of last year. Zurich and Geneva are moderately appreciated.
The outlook regarding the increase of prices in the long term explains the demand for investments in the residential real estate sector worldwide. Many operators believe that, on the long term, the best locations, the so-called superstars, will benefit from the increase in prices, thanks to the increase of wealthy families. Without forgetting that, in the last ten years, the decrease of mortgage rates has made more attractive buying a property. Till the offer will not increase, many buyers will have to deal with the gap between prices in the superstar cities and rent prices, incomes, and prices at national level. In the past two years, the “superstar model” has become popular due to the increase of the demand at international level, particularly coming from China, causing the exit of many local buyers. An average growth of prices of 20% in the last three years has confirmed the expectations of the most optimistic investors.
How to identify a bubble
The term “bubble” refers to sharp and long-lasting discrepancies in prices of a certain financial activity. Despite it’s not possible to determine the existence of a bubble until it pops, by analysing the statistical data, it’s possible to find the presence of recurring patterns of excessive evaluations in the real estate market.
The UBS Global Real Estate Bubble Index detects the risk of property bubble based on these patterns in the most important financial cities all around the world.
The index uses the following classification of risk: depressed market, undervalued, equally valued, overvalued, at bubble risk. Also for the cities with the most obvious signs of a bubble, it’s hard to tell exactly when the bubble will happen and how long it will last.
The analysis is integrated by a comparison between the price/income (PI) ratio and the price/rent (PR) ratio. A low access expressed by the PI ratio means a low risk of appreciation in the long period, while multiple high PR values are the sign of a dangerous dependence on low interest rates.
Translator: Cristina Ambrosi