How high interest rates contributed to the housing market's recovery

A study has found that real estate prices in the world's 25 largest cities have fallen sharply. According to a recent study by Swiss bank UBS, the risk of "overheated" real estate prices declined in the world's largest cities last year.

The latest UBS Global Real Estate Index, covering the world's 25 largest cities, shows real house prices have fallen by 5% on average, a trend that is likely to continue. The price declines noted in the report have significantly reduced the risk of a real estate bubble in these cities, which occurred during the 2008 financial crisis.

Only two cities, Zurich and Tokyo, remain in the 'bubble risk' category, compared to nine cities in''last year. Frankfurt, Munich and Amsterdam fell into the reduced 'revaluation risk' category in Europe, along with Geneva, London, Stockholm and Paris, which remained unchanged from the previous year. Madrid also saw a reduction in real estate price mismatch, meaning it is now of "sufficient value," as areMilan and Warsaw.

A real estate bubble occurs when real estate prices rise at a rate that cannot be sustained due to increased demand and limited supply. At some point, demand suddenly stalls or declines, leading to a sharp drop in prices, which causes the bubble to burst. UBS attributes the overall decline in real estate market mismatch to the current''s economic climate, which has been driven by a global spike in inflation and interest rates over the past two years, largely due to Russia's invasion of Ukraine and the COVID-19 pandemic, among other factors.

From mid-2022 to mid-2023, real house prices in the 25 cities surveyed by UBS fell by an average of 5%, with the bank indicating that further price declines are likely. The biggest price declines were recorded in Frankfurt and Toronto, with prices falling by 15%, according to UBS.

According to the report, housing at risk of a bubble is only in the country where UBS is headquartered, namely Zurich, and Tokyo. In the case of Zurich, real estate prices continued to rise through 2023, although the rate of growth was slower than in previous years, UBS said, with rental rate growth accelerating sharply and outpacing house price growth. "As the supply of affordable housing has returned to pre-pandemic levels and financing costs are rising, house prices are not expected to continue to rise," the bank added.

While Paris and London have experienced price corrections and have a low risk of creating a bubble compared to Zurich, price declines have not been''sufficient to significantly improve access to housing, says UBS. Prices remain out of line with incomes in Paris and London, the bank notes, pointing out that buying a 60-square-meter home still amounts to a 10-year annual salary for a skilled service worker. In light of this gap, UBS predicts prices will fall further if interest rates remain at current high levels, even if the real estate market is then able to recover.