Is the risk of price bubbles in the real estate market decreasing in 2023?

Analysis of price bubbles in the real estate market

According to the latest UBS Global Real Estate Bubble Index 2023, which analyzes the potential for price bubbles in the real estate market of the world's largest megacities, there is a noticeable decline in trends of asset overvaluation. First, let's understand what the signs of a price bubble in real estate are.

This concept implies an inadequate assessment of asset values, and the presence or absence of such a phenomenon can only be determined by its destructive consequences. Price bubbles are a cyclical phenomenon. The main characteristics of this phenomenon include a sharp rise in prices that is not supported by economic indicators.

• The increase in housing prices is not in line with the actual growth of the population's income.
• Current rental rates.
• There is an oversupply of properties in the market due to excessive construction of new buildings.
• Increase in mortgage lending volumes.

When a bubble forms in the market, it is at risk of bursting, which leads to a sharp decline in demand and a subsequent drop in prices.

Research methodology

The research methodology includes numerous factors indicating potential risks of overvaluation in the real estate market in 25 major cities around the world. UBS specialists analyze aspects such as:

• The ratio of housing prices to the income generated from it.
• Rental rates and housing prices.
• Dynamics of the relationship between mortgage lending and gross domestic product (GDP).
• Analysis of construction activity in the economies of these cities.

Cities where the index exceeds 1.5 are considered at risk of forming bubbles in the real estate market.

Current situation in the market

According to the latest data from UBS, there is a decrease in the imbalance in the housing market this year. Currently, only two cities remain in the risk category with overvalued real estate: Zurich and Tokyo.

In 2022, the situation was more dangerous, as nine cities were in the overheating zone:

• Vancouver
• Toronto
• Amsterdam
• Frankfurt
• Munich
• Zurich
• Tel Aviv
• Tokyo
• Hong Kong

Some markets, such as Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv, which were previously considered at risk, have now moved into the category of relative safety. In these cities, real estate may still be considered overvalued, but the likelihood of a bubble has significantly decreased. This information will be useful for investors looking to understand the current state of the market and make their future plans.

Risk assessment in the housing markets in 2023

In 2023, experts conducted a risk assessment of the housing markets in various megacities. On one hand, they presented risk indices for each individual city, and on the other hand, they analyzed the changes in real estate prices in the second quarter of 2023 compared to the same period of the previous year.

It's interesting that cities like Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney continue to be at a level of overvalued housing. As a result, 14 cities have entered the "yellow zone," indicating that the situation in these places is not excessively risky; however, prices do not align with fair market value.

Cities with reasonable housing prices

Among the cities where housing prices can be considered reasonable, nine main ones stand out:

• Milan, Italy
• New York, USA
• Singapore
• Madrid, Spain
• Boston, USA
• San Francisco, USA
• Dubai, UAE
• São Paulo, Brazil
• Warsaw, Poland

Features of the real estate market in Dubai

Dubai deserves special attention, as statistical data shows that over the past two years it has become attractive to Russian investors. Prices in this appealing emirate city are steadily increasing, with growth rates reaching double digits. Swiss analysts do not see any risks associated with this trend.

The income levels of local residents are rising faster than in other cities on the list, making the rental property market in Dubai very active. At the same time, the cost of housing, adjusted for inflation, is still about 25% lower than during the peak times of 2014.

Key findings of the research

Regarding the main results of this study, it is noticeable that over the past two years, the sharp rise in inflation and interest rates on loans has contributed to a significant reduction in imbalances in the housing markets of major global financial centers.

Conclusion

In conclusion, it is important to note that the results of the UBS Global Real Estate Bubble Index 2023 clearly demonstrate changes in the global real estate market. It seems that the dynamics of housing prices in the largest cities in the world are finally slowing down, which brings a certain optimism among analysts and investors. Despite the cyclical nature of price bubbles and all the known risks associated with asset overvaluation, we see that under current conditions, only two cities...ZurichandTokyoare still exposed to serious risk.

Factors of change in the market

The rise in inflation and interest rates seems to have played a key role in reducing imbalances in the housing markets. It is important to consider that previous overvalued markets, such asTorontoandFrankfurtNow they are gradually coming out of the risk zone. This change is a positive sign for the future of the real estate market, as it may contribute to a healthier economic environment.

The challenges that remain

Nevertheless, it is important to keep an eye on the relaxed state. Despite the overall optimism, many people still face challenges with housing availability, especially skilled workers in the service sector. Housing prices, which remain significantly below pre-pandemic levels, combined with rising mortgage rates, create a challenging landscape for future investments.

Conclusions

In conclusion, while we can observe positive changes, I recommend staying vigilant and closely analyzing the real estate market. Given its cyclical nature and the many factors influencing pricing, understanding current trends and forecasts will be critically important for anyone planning to invest in this sector in the future.