In a global pandemic, it can feel like every housing market is dealing with uncertainty. But certain cities that have been plagued with sky-high prices and low inventory are in significant trouble, according to the UBS Group AG’s annual Real Estate Bubble Index, released Wednesday.
According to the Index, seven cities across the globe are most at risk of a major housing bubble crash this year. While none of them are in the United States, they do share a similarity — popular metropolitan areas known for real estate prices that skyrocketed over the past decade.
“It’s clear that the acceleration over the past four quarters is not sustainable in the short run,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a statement. “Rents have been falling already in most cities, indicating that a correction phase will likely emerge when subsidies fade out and pressure on incomes increase.”
These are the seven cities most at risk of a crash:
A city that draws both visitors and workers from all over Europe, Munich has seen unprecedented growth in real estate prices over the last decade. According to the report, it could now be at risk of a “sharp correction” as its tourism (the famous Oktoberfest festival was canceled this year) and entertainment industries ground to a standstill this spring amid the coronavirus outbreak.
Along with Munich, Frankfurt is the second German city topping the list of cities most at risk of a housing bubble. The European business hub has seen rapid growth in its real estate market and, while the city draws in a lot of professionals, the prices are not keeping up with the number of people actually buying homes.
“Imbalances are increasing further in the wake of record low financing costs that are not in line with the strength of the local economies,” reads the report. “Most notably, prices in Frankfurt and Munich have more than doubled over the last decade.”
Canada’s largest city has many of the same problems as the other metropolises on this list — high rent and apartment prices that push many to move to the nearby suburbs. The pandemic outbreak accelerated this process all over the world as many North American residents in places like New York, San Francisco and Los Angeles all started breaking the decades-long trend 0f urban appeal by seeking to get away from high-density areas.
“Inner-city demand growth has slowed down as citizens move out to the suburbs as a result of affordability issues and the impacts of COVID-19,” reads the report. “Continued migration to lower-cost and more tax-, business-, and regulatory-friendly states has accelerated this trend.”
Hong Kong’s real estate market is now almost notorious for its inaccessibility — the prices are so high that even high-earning people often end up renting rooms or micro-apartments well into their professional lives. According to the report, such growth cannot keep up indefinitely and the market is due to correct itself quite sharply in the near future.
“Home prices both in Hong Kong and in Singapore were fairly stable during the first half of the year,” read the report. “But while real home prices in Hong Kong are over 50 percent higher than they were 10 years ago, prices in Singapore have remained virtually unchanged over this period.”
Just like Hong Kong, Paris is geographically tiny and known for through-the-roof prices due to its status as one of the world’s most beautiful and interesting cities.
An average apartment now goes for 1.3 million Euros (around $1.53 million USD). At the same time, however, the city is highly dependent on a tourism industry that has taken a major hit this year and, as a result of that, is at risk of experiencing a serious housing bubble.
Amsterdam, The Netherlands
The city of canals and capital of the Netherlands is, like Paris, highly dependent on tourists and limited by its small geography. While the difficulty of finding an apartment in the city at any price has been joked about by residents for years, the pandemic may quickly turn that around as the spring and summer left the city known for hordes of tourists virtually empty.
“Paris and Amsterdam closely follow suit, treading on bubble risk territory alongside the two German cities,” reads the report.
Out of all the Swiss cities, Zurich saw the highest growth in real estate in large part due to its status as an economic center and European business hub.
Unlike many of its EU counterparts, Switzerland ‘s market has not been as affected by the coronavirus outbreak and is seeing its housing prices rise at incredible speed. While this sounds like good news, it also places the city at risk of the kind of overvaluation currently observed in Hong Kong and California.
“The high willingness to pay reflects both expectations that prices will further increase and sustained investment demand. In line with these developments, the city now joins the bubble risk ranks,” reads the report.