Zurich and Tokyo Remain as Sole Bubble Risks in Global Real Estate Market

According to the UBS Global Real Estate Bubble Index 2023, published on Wednesday, imbalances in housing markets have seen a significant decline over the past year. Driven by macroeconomic factors, real house prices in 25 major cities fell 5 percent on average from mid-2022 to mid-2023. As a result, only two cities – Zurich followed by Tokyo – remain in the "bubble risk" category, compared to nine cities a year ago.

"The global surge in inflation and interest rates over the past two years has led to a sharp decline in imbalances in the housing markets of global financial centers on average," said UBS, predicting further declines.

In the Asia Pacific market, Tokyo led in terms of bubble risk, despite declining net immigration and moderately increasing mortgage rates. Meanwhile, real estate prices in Hong Kong fell 7 percent to inflation-adjusted levels last seen in 2017. However, the city remains overvalued according to UBS's index. Sydney's market was at the low end of overvalued markets as central bank rate hikes led to a price correction back to inflation-adjusted levels seen in 2018.

In contrast, real prices in Singapore have risen 15 percent since 2018 but are considered fairly valued due to a concurrent 40 percent rental surge.

Zurich tops the bubble risk ranking with a value of 1.71, slightly ahead of Tokyo at 1.65 points. The bubble risk threshold commences at 1.5 points. Cities including Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv exited the risk area within a year.

"Crisis? What crisis?! A think-tank takes provocative aim at what it sees as the 'myths' of the Swiss housing market," said Claudio Saputelli, head of real estate in the Chief Investment Office of UBS Global Wealth Management. He attributed the decline in risks mainly to the fall in real estate prices, which on average, have fallen by 5% since mid-2022.

Despite a slowdown in price increases, Zurich remains one of the few cities where property prices continued to rise in 2023. Buyers currently pay 40% more for real estate than they did ten years ago, while rents only rose by around 12% over the same period. This high imbalance between purchase prices and rents contributes to the sustained risk of a bubble.

However, the gap has started to close as rents have risen faster than property prices in recent quarters. With an increase in properties on the market due to higher interest rates, analysts do not anticipate further price increases in Zurich for now. UBS experts predict that the bubble risk will continue to decline gradually over the next few years.

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