In what world is there a risk of a real estate bubble?

Increases in global inflation and interest rates over the past two years have led to a sharp decline in imbalances in global real estate markets in financial centers, according to the UBS Global Real Estate Bubble Index 2023. Only two cities - Zurich and Tokyo - remain in the real estate bubble risk category this year. Portugal was not analyzed in the study, but several national players reject this scenario for the country, as the limited supply of housing still does not respond to existing demand.

Swiss bank UBS has analyzed residential real estate prices in 25 major cities around the world. Between mid-2022 and mid-2023, real house prices in cities fell by an average of 5%, and are likely to continue falling. According to the Swiss bank, the sharp decline in imbalances was caused not only by falling house prices, but also by falling incomes (due to rising inflation) and rising rents.

Price corrections across the line

Low financing costs have been the "lifeblood" of global real estate markets over the past decade, "driving home prices to record heights," according to a UBS study. However, the abrupt end of a period with low (and even negative) interest rates has "shaken the house of cards." On average last year, inflation-adjusted home prices experienced their steepest decline since the 2008 global financial crisis. Cities that have been categorized as "real estate bubble risk" at least once in the past three years showed even steeper declines in average prices. However, the impact of higher interest rates varies significantly from city to city, and the price correction also depends on other factors.

"Adjusted for inflation, prices are actually 5% lower now than they were in mid-2022. On average, cities have lost most of the real price gains made during the pandemic and are now around mid-2020 levels," commented Claudio Saputelli, head of real estate in the Southeast office of UBS Global Wealth Management.

Risk in Zurich and Tokyo

House prices in Zurich continued to rise in 2023, albeit more slowly than in previous years. Buyers of residential real estate now pay 40% more than they did a decade ago. This value is well above the national average and is stronger than the rise in rents, which have increased by almost 12% since 2013. The ratio between purchase prices and rents remains unbalanced - especially given the increased interest rates. "The market therefore remains at risk of a real estate bubble," says the bank.

Imbalances in Tokyo's real estate market continue to grow, resulting in a gradual shift from an undervalued city to real estate bubble risk territory over the past 20 years, in contrast to the rest of the country. Real estate prices have continued to rise for more than two decades, separate from the rest of the country, supported by attractive financing conditions and population growth. While income growth has not been able to accompany the pace of price appreciation and mortgage rates, which have risen moderately, in recent quarters, the momentum in nominal home prices has not weakened.

Europe, Asia and the Americas: highlighted cities

Hong Kong has been consistently at risk of a real estate bubble since the first edition of this study. "After declining by 7% from mid-2022 to mid-2023, inflation-adjusted house prices in Hong Kong have returned to levels last seen in 2017. Overall, we now see the city in the revaluation zone," the study said.

In Frankfurt and Toronto, the two most risky cities in last year's edition, real prices have fallen 15% over the past four quarters. High market valuations and relatively short mortgage terms have also put strong pressure on prices in Stockholm and, to a lesser extent, Sydney, London and Vancouver. In contrast, in Madrid, New York and São Paulo - cities with moderate risk assessments so far - real house prices continued to rise moderately.

Real estate 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 worst level since 2007 due to high interest rates.

In Amsterdam, prices have dropped by 14% - the most significant annual correction since the 1980s.

Housing prices in Miami continue to rise faster than the national average. The price level has more than doubled in the last 10 years. The city is the main beneficiary of the increased appeal of "sunbelt" cities in the U.S.

The fluctuations caused by the pandemic in the New York residential real estate market have largely come to an end, according to UBS. In 2021 and 2022, the Manhattan real estate market sharply recovered as restrictions were gradually lifted and people returned to the city. "Since supply is structurally limited and, more importantly, the market was not at risk of a real estate bubble, 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% compared to inflation, recovering all the losses accumulated during the pandemic. Overall, the New York residential real estate market is quite overvalued and is expected to remain stable for the time being, in our opinion," the study states.

Prices in Dubai have been rising since 2021, increasing by 15% from mid-2022 to mid-2023, which is the highest growth rate among all the cities analyzed in the study. The rise in luxury real estate prices has been even more pronounced. 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," notes the Swiss bank. Additionally, thanks to higher raw material prices, Dubai has demonstrated strong economic growth and an increase in household income since 2021, surpassing other cities. "As a result, the volume of residential real estate transactions has increased, reaching historic highs. However, inflation-adjusted prices are still about 25% lower than their peak in 2014," explains UBS.

The situation in Portugal: a supply shortage pushes away from a bubble scenario.

The specter of a real estate bubble has been looming over Portugal for several years. But the truth is that market players continue to reject this scenario, as the supply of housing remains insufficient. And even if demand is decreasing (the number of transactions is already declining, according to the latest data from the National Institute of Statistics), we are likely to see a stabilization of prices and an increase in selling times - that is, selling apartments is taking longer. Additionally, banks have stricter conditions than in the past, which also means a lower risk of default.

Antonio Ramalho, the former CEO of Novo Banco, completely rejects this possibility, despite the fact that housing prices have risen sharply in recent years. At the PortugalReal Estate Summit, he emphasized that "Portugal does not have and will never have a real estate bubble." Furthermore, the labor market is in good shape, and the demand for housing still significantly exceeds the supply of residential properties (unlike the real estate crisis in 2008, when there was more construction than buyers). 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 residential real estate market in Portugal and also explained why she believes there is no phenomenon of speculation here.