top of page

Housing Bubble Deflates Globally but one European City.

Amsterdam, Frankfurt, and Munich are the European cities that have been reclassified as lower risk.

London, Friday 22 September 2023

In the wake of price corrections in 25 locations worldwide, the likelihood of a global real estate bubble has decreased, according to research conducted by Swiss bank UBS. UBS's Global Real Estate Bubble Index, which was released on Wednesday, shows that, compared to nine cities a year ago, just Zurich and Tokyo are still classified as "bubble risk" cities.

The European cities that have fallen into the lower-risk "overvalued" category are Frankfurt, Munich, and Amsterdam. Geneva, London, Stockholm, and Paris are the only cities that have not altered from the previous year. With Milan and Warsaw, Madrid has also experienced a decline in disparities in real estate prices, according to UBS, making it "fairly valued" at this point.

When demand for real estate increases faster than supply, the result is an unsustainable rise in prices, known as a real estate or housing bubble. Eventually, there is a sudden freeze or reduction in demand, which causes prices to drop sharply and pops the bubble. UBS reports that prices fell by 15% in Frankfurt and Toronto, which suffered the largest declines. In the UBS report from the previous year, the two cities earned the highest risk ratings.

The report's authors stated, "Low financing costs have been the lifeblood of global housing markets over the past decade, driving home prices to dizzying heights." But the unexpected cessation of the low interest rate environment has upset the fragile balance of power.

According to the analysis, the only places currently at risk of a real estate bubble are Tokyo and Zurich, home of UBS's headquarters. In the former scenario, real estate prices grew in 2023, albeit more slowly than in prior years, according to UBS, but rental growth surged and outpaced the increase in home prices. The bank continued, "We do not expect to see further price upside as the supply of available housing has climbed back to pre-pandemic levels amidst rising financing costs."

A trembling deck of cards According to UBS, the current state of the economy is to blame for the overall decrease in housing market imbalances. Inflation and interest rates have increased globally over the last two years, mostly as a result of Russia's invasion of Ukraine and the COVID-19 outbreak. Real home prices in the 25 locations that UBS looked at decreased by 5% on average between mid-2022 and mid-2023, the bank said, adding that more price declines are probably ahead.

Housing availability is still an issue.

UBS claims that although certain cities, like London and Paris, have had price corrections and are less vulnerable to bubbles than Zurich, the decrease in prices has not been sufficient to greatly increase housing availability.

The bank stated that prices in Paris and London are still not in line with earnings, adding that the acquisition of a 60 square metre home still equates to ten years' worth of pay for a competent worker in the service industry.

In light of this discrepancy, UBS predicts that even while the housing scarcity may eventually improve, more price declines are still probable if interest rates stay at their current high levels.

Last week, the European Central Bank raised interest rates to 4%. On Thursday, the Bank of England is expected to make its most recent interest rate announcement.


bottom of page