Should we be worried about the housing bubble bursting?

According to the 2023 UBS Global Real Estate Bubble Index, imbalances in the real estate markets of major capitals have declined significantly.

Along with them, they have mitigated the risks of a real estate bubble bursting. The sharp rise in inflation and interest rates worldwide over the past two years has, on average, led to a significant reduction in imbalances in the real estate markets of global financial centers. 

To reach these conclusions, UBS analyzed residential real estate prices in 25 major cities around the world. From mid-2022 to mid-2023, real estate prices in these cities fell by an average of 5%. A price decline is becoming increasingly likely. And according to the Swiss bank, only Zurich and Tokyo remain in the category of cities at risk of a real estate bubble. 
 

Previously classified as being in the “bubble risk” zone, Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv are now all in the “overvalued” category. Unchanged from the previous year, the housing markets in Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney also remain in this category.
“In Paris, real estate prices began to fall in 2021. The decline has accelerated in recent quarters due to reduced affordability, credit restrictions, and an increase in property taxes,” says Claudia Panseri, Chief Investment Officer for France. 
 

Claudio Saputelli, head of real estate at the Chief Investment Office (CIO) of UBS Global Wealth Management, adds: “In inflation-adjusted terms, prices are 5% below those of mid-2022. On average, most cities have lost the price gains made during the pandemic and have returned to their mid-2020 levels. ”
Real estate price growth has been hampered by rising financing costs, with average mortgage rates having nearly tripled since 2021 in most markets. Annual nominal price growth in the 25 cities analyzed has come to a halt after a sharp 10% increase a year ago. 
 

The sharp decline in imbalances is also linked to inflation-driven growth in incomes and rents. While mortgage growth has halved since mid-2022, household debt-to-income ratios have declined, particularly in Europe. Outside the United States, nominal rent growth has accelerated significantly and has been positive in all regions analyzed.
However, inflation-adjusted income growth, along with price corrections, has not been sufficient to significantly improve affordability. On average, the number of affordable living spaces for a skilled service-sector worker is still 40% lower than it was before the start of the pandemic. Further price declines (at least in real terms) are likely if interest rates remain at their current high levels.  
In some cities, however, the seeds of the next real estate price boom have already been sown. Hybrid work has not permanently weakened demand for urban housing, and the housing shortage is expected to intensify due to the recent decline in building permits, particularly in European city centers.