Inexpensive financing combined with bullish expectation has driven real estate prices. While many cities are overvalued by now, London and Hong Kong inherit the greatest risk of facing a real estate bubble, says UBS.
The giant cash injections of central banks after the financial crisis have decreased interest rates and provided investors with the cheap capital to invest in real estate. An asset class that they regarded as promising high returns compared to investing in bonds. Those two factors have increased investments in real estate dramatically during the last years and may decoupled real estate prices from fundamental factors - especially in the world’s financial centres. “The risk of a real estate bubble in these cities has risen sharply,” says UBS in their report “UBS Global Real Estate Bubble Index” analysing the serenity of various bubble symptoms.
Since 1998, real estate prices have doubled in real terms and are now on average higher than they were before the global financial crisis, claims the report. While many cities are overvalued, London and Hong Kong have the most district bubble risk. Those cities with the highest bubble risk face higher risk of a large price correction.
In North America, San Francisco and Vancouver are currently overvalued. New York and Boston are valued fairly while Chicago fell to a state of undervaluation.
In the Asian-Pacific region, the Cities of Tokyo, Sydney and Singapore are overvalued. Hong Kong even faces a bubble risk.
In Europe, all prices exceed fair value too. London is by far the most overvalued city and currently faces a bubble risk.