If your real estate adventures go beyond our national borders, beware of bubble-risk cities. Swiss bank UBS just released its latest Global Real Estate Bubble Index, and seven cities are in the high-risk category. Fortunately, none are located in the U.S. although several U.S. cities are ranked as overvalued.
The UBS report tracks residential property prices in 24 major cities around the world. To come up with a score that represents where these cities stand in terms of a potential real estate bubble, it analyzes the relationship between home prices, the cost of rent, economic growth, and home construction activity.
The 2019 report shows that many of the cities at the highest risk of a bubble are in the European Union, thanks in part to negative interest rates. At the top of the risk list is Munich. It’s a city in southern Germany which has pushed well into bubble territory with a score of 2.01. Anything over 1.50 is at risk of a bubble. Toronto, Canada, was second with a score of 1.86. That was followed by Amsterdam, Frankfurt, Vancouver, and Paris.
San Francisco Price Correction
The U.S. city closest to the bubble risk level is San Francisco. It has a reading of 1.15 which means that it’s overvalued, although price growth has slowed to a crawl. The report says, San Francisco prices increased by 85% between 2012 and 2018. That’s because of the influx of technology companies and venture capitalists willing to plunk down big bucks.
The market has cooled off a bit though. Prices have dropped about 5% over the last year. The report blames the fall-off on affordability issues, trade tensions, and a drop in foreign demand. UBS says, housing permits for San Francisco are at their highest level since the late 1980s and suggests that we could see a boost in supply and the beginnings of a price correction.
Los Angeles 2020 Slowdown
Los Angeles real estate is also overvalued with a 50% surge in prices since 2012, although it falls behind San Francisco with a score of .99. Things have slowed down a bit in the last year, with a 2% increase in prices for the last four quarters.
UBS expects demand to weaken next year because of the impact of the trade war. It doesn’t expect to see a sharp decline in prices however, unless we are hit by recession. It also mentions a high number of building permits there, which could help balance the market.
New York Remains Overvalued
New York home prices have fallen slightly in the last year, but they remain in the overvalued category. UBS says, the real price level is 10% lower than it was in 2006 before the market crashed, and that rents are up almost 60% after you adjust for inflation. Prices are not expected to surge higher in the near future because of a lack of economic momentum in Manhattan.
UBS says, political issues are one thing keeping a lid on the economy. Those include things like the recently approved “Mansion Tax” and a push for even tighter rent control rules. New York’s score on the bubble index is .50.
Higher Prices in Boston but Affordable
The one American city in the fair value category is Boston. UBS gave it a score of .36. The Boston real estate market has been on an upswing with prices moving higher since 2012. They rose 3% over the last year which is about the same as the national average.
Boston price increases had been lagging, but UBS says the city’s economic appeal has led to strong population growth and housing demand. It has remained affordable however. UBS says that if mortgage rates drop further, you could see higher prices in Boston over the near to medium term.
Chicago Has Plenty of Upside
Chicago is the only city in the index that is undervalued. UBS gave Chicago a score of – .77 which is an eye-catching number for anyone interested in real estate investing. The report says, Chicago home prices have risen 2% in the last year and are 15% higher than they were in 2013 at the bottom of the recession. But, they are still more than 25% below what they were in 2006.
The report says, the city is dealing with a lot of debt, a slow economy, and a declining population. It also says, Chicago has a lot of upside potential if the economy improves. Investors may find that Chicago offers a great value for their money. The Windy City is one of our single-family rental markets for this very reason.
You can find out more about our take on Chicago here
(1) UBS Report