Where in the world is there a risk of a property bubble?

The increase in inflation and interest rates over the past two years has led to a sharp reduction in imbalances in global real estate markets in major financial centers, according to the UBS Global Real Estate Bubble Index 2023. This year, only two cities - Zurich and Tokyo - remain in the "at-risk real estate" category. Portugal was not included in the study, but several national players reject this scenario for the country, as the insufficient housing supply continues to fail to meet existing demand. The Swiss bank UBS analyzed residential property prices in 25 major cities around the world. From mid-2022 to mid-2023, real housing prices in these cities decreased by an average of 5% - and are likely to continue to decline further. According to the Swiss bank, the sharp reduction in imbalances was caused not only by falling housing prices but also by declining incomes (due to rising inflation) and increasing rental costs.

Price adjustments across the entire range

Low financing costs have been the "lifeblood" of global real estate markets over the past decade, "driving housing prices to record heights," according to a UBS study. However, the abrupt end of the period of low (and even negative) interest rates has "shaken the fragile structure." On average across all cities, last year housing prices, adjusted for inflation, experienced the sharpest decline since the global financial crisis of 2008. Cities that have been classified as at risk of a real estate bubble at least once in the past three years saw an even steeper drop in average prices. However, the impact of higher interest rates varies significantly from city to city, and price corrections also depend on various other factors.

"Taking inflation into account, prices are actually 5% lower than in mid-2022. On average, cities have lost most of the real price growth gained during the pandemic, and are now approaching levels seen in mid-2020," comments Claudio Saputelli, head of the real estate department at UBS Global Wealth Management. Zurich and Tokyo are cities at risk.

Housing prices in Zurich continue to rise in 2023, although at a slower pace than in previous years. Homebuyers are now paying 40% more than they did ten years ago. This figure significantly exceeds the national average and is a sharper increase than rental prices, which have risen by nearly 12% since 2013. The ratio between purchase prices and rental rates remains unbalanced, especially considering the higher interest rates. "The market is still at risk of a bubble," claims the bank.

Imbalances in the real estate market in Tokyo continue to grow, transforming the city from undervalued to a bubble risk zone over the past 20 years, unlike the rest of the country. Property prices have been rising almost continuously for more than two decades, separate from the rest of the country, supported by attractive financing conditions and population growth. Although income growth has not kept pace with the rate of price increases and mortgage rates, which have risen moderately in recent quarters, the dynamics of nominal housing prices have not weakened.

Europe, Asia, and America: Cities in the Spotlight

Hong Kong has been constantly at risk of a bubble since the first edition of this study. "After a 7% decline from mid-2022 to mid-2023, inflation-adjusted housing prices in Hong Kong have returned to levels last seen in 2017. Overall, we now see the city in a state of overvaluation," the study states.

In Frankfurt and Toronto - two cities with the highest risk ratings in last year's report - real prices have decreased by 15% over the last four quarters. High market ratings and relatively short mortgage terms have also put significant pressure on prices in Stockholm and, to a lesser extent, in Sydney, London, and Vancouver. In contrast, in Madrid, New York, and São Paulo - cities with moderate risk ratings so far - housing prices have continued to grow moderately.

Housing prices in the London market have been on a downward trajectory since Brexit in 2016. Despite a structural supply deficit, prices remain below the national average. In the absence of strong international demand, housing prices continue to be under pressure, as local affordability is at its lowest level since 2007 due to high interest rates. In Amsterdam, prices have dropped by 14% - the most significant annual correction since the 1980s. Deteriorating financial conditions, declining purchasing power of households, and regulatory changes are simultaneously impacting demand.

Housing prices in Miami continue to rise faster than the national average. The price level has more than doubled over the past 10 years. The city is the main beneficiary of the growing appeal of cities in the "sunbelt" of the U.S. The pandemic led to instability in the residential real estate market in New York, but according to UBS, that is mostly over. In 2021 and 2022, the Manhattan real estate market rebounded significantly as restrictions were gradually lifted and people returned to the city. "Since supply is structurally limited and, more importantly, the market was not in a bubble risk state, the sharp increase in interest rates had only a limited impact on local housing prices. From mid-2022 to mid-2023, sale prices increased by more than 3% when adjusted for inflation, recovering all the losses accumulated during the pandemic. Overall, the Manhattan real estate market is valued quite highly and is expected to remain stable in the near future, according to the study. Prices in Dubai have been rising since 2021 and increased by 15% from mid-2022 to mid-2023, the highest growth rate among all cities analyzed in the study. The price growth in the luxury segment has been even stronger. The city attracts real estate investors from around the world. "The new visa program with more flexible residency requirements for wealthy and skilled individuals, the absence of personal income tax, and the early lifting of travel restrictions during the pandemic have stimulated immigration," emphasizes the Swiss bank. Additionally, due to rising commodity prices, Dubai has experienced strong economic growth and an increase in household incomes since 2021, surpassing other cities. "As a result, transaction volumes in residential real estate have reached historic highs. However, inflation-adjusted prices are about 25% lower than the peak in 2014," explains UBS.

The situation in Portugal: a lack of supply pushes away the bubble scenario.

The ghost of a real estate bubble has been looming over Portugal for several years. But the truth is that market participants continue to reject this scenario, as the supply of housing remains limited. And even if demand slows down (the number of transactions is already decreasing, according to the latest INE data), what we can observe is a stabilization of prices and an increase in selling times - that is, selling real estate is taking longer. Furthermore, banks have stricter conditions than in the past, which also reduces the risk of defaults.

Antonio Ramalho, the former CEO of Novo Banco, completely rules out this possibility, despite the fact that real estate prices have risen in recent years. At the PortugalReal Estate Summit, he noted that "Portugal has never had and will never have a real estate bubble." Furthermore, the labor market is stable, and the demand for housing still significantly exceeds the supply of residential properties (unlike the situation during the real estate crisis of 2008, when construction outpaced demand). According to the manager, "the rise in prices was not related to an increase in household debt."

In an interview with Idealista/News, economist Vera Gouveia Barros analyzed the housing market in Portugal and explained why she believes we are not facing a phenomenon of speculation in the real estate market. "There is a lot of talk about the mechanism of speculation in the real estate market, and it would be good to understand what speculation is. When I have a real estate bubble, a speculative bubble, prices rise. But this increase in prices does not necessarily mean that...