Skyscrapers of Hong Kong
Experts of the financial conglomerate have long kept their finger on the pulse of the real estate market, publishing quarterly information on the Swiss Real Estate Bubble Index. The term "bubble" means that assets have been significantly overvalued for a long time. How fair such an assessment is can be known with certainty only when the bubble bursts. And until a crisis occurs, such indicators allow market participants and regulatory authorities to assess risks.
According to the latest UBS estimates, reports Nashagazeta.ch, the Swiss market is in a "risk" phase, but a bubble has not yet formed. Nevertheless, stable demand for housing combined with high prices and cheap mortgage loans have kept the market in a "heated" state for several years, forcing authorities to resort to some restrictive measures.
However, according to the new UBS study, things are not so bad in Switzerland. Much more significant is the risk of formation and bursting of bubbles in London and Hong Kong, which scored 1.88 and 1.67 points respectively on the Global Real Estate Bubble Index. "The real estate market is in risk territory," note the authors of the study, reviewing the situation in London. "A price correction seems inevitable," states the commentary to the description of the Hong Kong real estate market.
Deviations from the norm have been observed for a long time in Sydney (1.39), Vancouver (1.35), San Francisco (1.15) and Amsterdam (1.07), indicating a significant overvaluation of local housing. Property prices are also inflated in Geneva (0.91), Zurich (0.86), Paris (0.77) and Frankfurt (0.76) and to a lesser extent in Tokyo (0.6) and Singapore (0.56), experts note.
Fairly reasonable, from a historical perspective, housing prices have been established in New York (0.19) and Boston (0.15). Meanwhile, property owners in Chicago (–0.7), on the contrary, could have gotten much more for it under different circumstances. Thus, prices in this city are still 31% below their 2006 peak values.
"A cocktail of optimistic expectations, favorable economic conditions, and an influx of foreign capital has recently led to price increases in some cities. Flexible monetary policy has prevented real estate markets from stabilizing and has contributed to an increased risk of local bubbles," explained Claudio Saputelli, head of global real estate at the investment service of UBS's private wealth management division.
The experts' analysis of bubbles is supplemented by data on the price-to-income and price-to-rent ratios in these regions. The first indicator corresponds to the number of years of work required for a highly skilled professional to buy an apartment of 60 square meters near the city center. The second equals the sum of rental payments equivalent to the purchase price of a home of the same size.
In the price-to-income ratio, Hong Kong is the undisputed leader, where one needs to work for more than 20 years to save up for an apartment. It should be noted that residents of many world megacities have to save money or pay mortgage loans to the bank for several years or even decades. However, in this case we are talking about highly qualified (and therefore well-paid) professionals and a fairly modest size. Experts note that unjustifiably high prices indicate a high dependence on foreign demand.
Hong Kong's closest competitors in this criterion have more rosy prospects: residents of London, Paris and Singapore have a chance to save up for their own nest egg in 13-14 years. In Geneva and Zurich, according to UBS, one can improve their housing conditions in just 6-7 years, albeit only with a high income level.
At the same time, Switzerland's financial capital is unmatched in the price-to-rent criterion: the purchase price of an apartment for a Zurich resident is equivalent to 37 years of rent, which indicates a high dependence of property prices on low loan interest rates, UBS experts believe. However, residents of Vancouver, Hong Kong, Geneva, Singapore, Paris and London would also save more than 30 years of rent by buying their own home.
Be that as it may, according to a combination of factors, Geneva and Zurich ended up closer to the lower threshold of the "overvalued property" bracket, which corresponds to a bubble indicator value in the range of 0.5 to 1.5, UBS experts note. Over the past three years, prices in the city of Calvin have fallen by 5%, while rural areas have slightly improved their indicators. High rental levels and stable incomes have contributed to a decline in the indicator.
In Zurich, on the contrary, since the end of the financial crisis, prices have increased by 30% – such growth rates are quite noticeable among the cities that were the subjects of the study. Rental and income indicators have remained at the same level, which does not prevent Zurich from leading in the "price-to-rent" category.