The risk of a real estate bubble is decreasing.

Frankfurt, Monaco and Amsterdam have fallen to the bottom risk category Reduced risk of a global real estate bubble as a result of real estate price adjustments in 25 cities around the world. That's according to a study by Swiss bank UBS.

According to the latest edition of the UBS Global Real Estate Bubble Index released Wednesday, just two cities - Zurich and Tokyo - remain in the "real estate bubble risk" category, up from nine cities last year.

Frankfurt, Munich and Amsterdam are the European cities that dropped into the "overvalued", low-risk category, along with Geneva, London, Stockholm and Paris, which remained unchanged from last year. Madrid also recorded a reduction in its real estate price imbalance, meaning it is now "fairly valued", along with Milan and Warsaw.

A real estate bubble occurs when real estate prices increase at a rapid and unsustainable rate due to rising demand and limited supply. At some point, demand stops or shrinks dramatically, causing prices to plummet and the bubble to burst.

The paper castle that's shaking, UBS attributes the general downturn in the real estate market to the current economic environment, which has seen global inflation and interest rates rise over the past two years due to Russian intervention in Ukraine and the Covid-19 pandemic.

Mid-2022 to mid-2023, real house prices in the 25 cities studied by UBS fell by an average of 5 percent, the bank said, adding that further price declines are likely. According to UBS, the biggest declines were in Frankfurt and Toronto, where prices fell by 15%. Both cities received the highest risk scores in last year's UBS report.

"Low financing costs have become vital to global real estate markets over the past decade, pushing house prices to exorbitant levels," the report's authors said, "but the abrupt end to low interest rates has shaken the paper castle.

Only Zurich, where UBS is headquartered, and Tokyo are in danger of a real estate bubble, according to the report. In the former case, real house prices continue to rise throughout 2023, albeit at a lower rate than in previous years, according to UBS, while rent growth has accelerated strongly, outpacing house price growth. "As the supply of affordable housing has returned to pre-pandemic levels with financing costs rising, we do not expect prices to rise further," the bank added. Access to housing remains a challenge.

Although Paris and London have corrected prices and are less at risk of a bubble than Zurich, the price reductions have not been enough to significantly improve access to housing. Prices remain disproportionate to wages in Paris and London, the bank said, pointing out that buying a 60-square-meter home still represents 10 years of annual wages for a skilled service worker. With this gap, UBS said further price declines are likely if interest rates remain at high levels, although the housing shortage could recover.

The European Central Bank raised interest rates to 4% last week. On Thursday, the Bank of England will announce its latest interest rate decision.