London, Hong Kong Among Major Cities at Risk For a Housing Bubble Burst

Written By Kristina Kennedy-Aguero | October 31, 2017 | Published in Real Estate Market Trends
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The recently released figures in the UBS Global Real Estate Bubble Index annual report could be good news for New York real estate. With an index score of 0.19 in the residential market, properties here are considered to be fairly valued.

Price bubbles are phenomena which recur regularly in the property markets and the term is used to refer to a sustained and substantial mispricing of a given asset. However, the existence of the bubble can only really be proved when it actually bursts. Typical indications of a price bubble include excessive construction and lending activities, along with a distortion of the real economy and the decoupling of rent and purchase prices from local incomes. The index uses these patterns to calculate the current risk level, but it does not make any predictions about the future, which can be influenced by a wide range of external changes. The index tracks the risk of so-called housing bubbles in the world financial centers.

Toronto tops the UBS Global Real Estate Bubble Index this year, with an index figure of 2.12, which reflects a significant rise over last year’s figure. Others in the highest risk sector are Stockholm, Vancouver, Munich, and Sydney, all showing an increase in real housing prices of around 50-percent over the last five years, compared to a 15-percent rise in most major cities.

London came in 6th with an index figure of 1.77, closely followed by Hong Kong with 1.74, and both these cities have maintained their in-risk position over the last three years. Two of the authors of the index, Matthias Holshey and Claudio Saputelli, maintain that housing prices in these cities are “fundamentally unjustified,” as even highly skilled workers are unable to afford to purchase an average priced property. Amsterdam rounds off the list of at-risk cities with an index of 1.59 and entered into this group for the first time this year.

None of the at-risk cities are located in the US. However, both San Francisco, with an index figure of 1.15, and Los Angeles, which scored 1.13, are considered to be overvalued. Chicago with a negative index figure of -0.70 was considered to be undervalued, while both Boston and New York with respective indexes of 0.15 and 0.19 came into the fair bracket. The house prices in these cities were considered justified in view of the local income level, job growth, and average housing size, and many US cities are benefitting from the housing bubble with prices being supported by the increase in available jobs, especially those in the technical industries.

While some interpret these high-risk figures as predicting a bubble burst, others, like Johnathan Woloshin, another of the report’s authors, feel that it is actually a positive reflection of the state of the economy global, and explains that although the term bubble is used to describe the situation it does not necessarily mean that high-risk cities are in “danger of imploding.”

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