The UBS Global Real Estate Bubble Index 2018 report said Singapore is one of this study’s few cities whose housing affordability has improved over the past decade. The 2018 Index 2018 from UBS Global Wealth Management’s Chief Investment Office indicates bubble risk or a significant overvaluation of housing markets in most major developed market financial centers.
Bubble risk appears greatest in Hong Kong, followed by Munich, Toronto, Vancouver, London and Amsterdam. Major imbalances also characterize Stockholm, Paris, San Francisco, Frankfurt and Sydney. Valuations are stretched in Zurich and Geneva as well as Los Angeles, Tokyo, and New York. By contrast, property markets in Boston, Singapore and Milan seem fairly valued while Chicago is undervalued.
Bubble risk soared in Munich, Amsterdam and Hong Kong over the last year. In Vancouver, San Francisco and Frankfurt, too, imbalances continued to grow. More broadly, index scores fell in no less than one-third of the cities. Stockholm and Sydney experienced the steepest drop and moved out of bubble risk territory. Valuations went down slightly in London, New York, Milan, Toronto and Geneva.
In contrast to the boom of the mid-2000s, however, no global evidence of simultaneous excesses in lending and construction exists. Outstanding mortgage volumes are growing half as fast as in the run-up to the financial crisis, limiting economic damage from any price correction.
“Although many financial centers remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management. “Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto, and London.”
“The median total return on housing in the most important developed market financial centers was 10% annually over the past five years, accounting for an imputed rental income and book profits from rising prices,” said Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office. “How appealing returns will be in the next few years is questionable. We recommend caution when buying residential real estate in most of the biggest developed market cities.”
In the past year, the house price boom in key cities lost intensity and scope. Inflation-adjusted city prices increased by 3.5% on average over the last four quarters, considerably less than in previous years but still above the 10-year average. They remained on an explosive uptrend in the largest Eurozone economic centers, as well as in Hong Kong or Vancouver. But the first cracks in the boom’s foundation have begun appearing: house prices declined in half of last year’s bubble risk cities – in London, Stockholm and Sydney by more than 5% in real terms.
Housing Affordability crisis weighs upon outlook
The median price-to-income (PI) multiple of the cities in the study increased from 5.5 in 2008 to 7.5 today. Most households can no longer afford to buy property in the top financial centers without a substantial inheritance. As property became too pricy for citizens over the past five years in close to all cities additional regulations were introduced ranging from levying stamp duties to rent-control measures. Such regulations combined with tighter lending conditions can abruptly end a real estate boom, as the current example of Sydney shows. Overall, low housing affordability jeopardizes cities’ long-term growth potential and could cause investors to reassess their expectations about future capital gains.
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The report noted that in Asia, Hong Kong tops the Index in 2018, and that house prices have continues to increase by an annual rate of almost 10% since 2012. In contrast, Singapore inflation-adjusted prices staged a fulminant recovery in the last four quarters after six years of correction – rising by 9 per cent. The report said Singapore remained in fair-valued territory, and that it is one of this study’s few cities whose housing affordability has improved over the past decade.
“In contrast to those of their US and European counterparts, property prices in Hong Kong and Singapore soared by double-digit rates shortly after the Great Financial Crisis as capital shifted to emerging economies. But in Singapore overall house prices have stayed pretty much the same since 2012. Last year’s price climb provoked an increase in stamp duties targeted at speculative investors. Valuations still managed to inch up but the city remains in fair-valued territory. By contrast, the index points to bubble-risk territory in Hong Kong, where house prices have continued to increase by an annual rate of almost 10% since 2012. Regulatory measures proved ineffective to restrain insatiable investor demand and speculative price expectations…
“Inflation-adjusted prices staged a fulminant recovery in the last four quarters after six years of correction, rising by 9%. Nonetheless, the market remains fairly valued. Prices are 5% below their 2011 peak and the price-income ratio is still shy of its long-term average.
“Vacancy rates declined until the middle of this year, but the long-term supply is well-stocked. Housing permits surged in anticipation of the transaction market recovering further after bottoming out in the second half of last year. The surprise regulatory policy tightening announced in July should dampen investor appetite. Additional buyer stamp duties (ABSD) have been targeted specifically at developers to limit land price speculation. Purchasers of investment properties have also been slapped with higher ABSD. So we expect speculative buying to decline and price growth to decelerate by the end of the year. Rising interest rates limit the upside as well. Overall, the consequent stalling of any price rebound by the government prevents the emergence of speculative tendencies in the real estate market.”
Singapore is one of few cities whose housing affordability has improved over the past decade
“Private market housing remains barely affordable: the price-to-income ratio for a 60m2 (650 sqft) flat is around 12 (public housing, however, represents 80% of the total market). But Singapore is one of this study’s few cities whose affordability has improved over the past decade.”
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