US cities have not increased their risk of a housing bubble

by Steve Randall01 Oct 2019

Some of the largest US housing markets have shown no increase in their risk of a bubble according to an international analysis.

The Global Real Estate Bubble Index from asset manager UBS analyzes residential property prices in 24 major cities around the world and reports the risk of a bubble year-over-year.

The 2019 index is led by Munich with Toronto close behind along with Hong Kong, Amsterdam, Frankfurt, Vancouver, and Paris.

Among the US cities included – San Francisco, Los Angeles, New York, Boston, and Chicago - index scores have not risen for the first time since 2011.

Regulatory changes and affordability issues have caused home prices in New York to lag the countrywide average while affordability issues, trade tensions and diminishing foreign demand have capped price growth in San Francisco and Los Angeles for now.

Boston is still in fair value territory and benefits from the appeal of the region for businesses and high income earners while Chicago is undervalued but continues to lag far behind given its increasing fiscal challenges.

Tighter lending conditions
"The worldwide collapse in interest rates will not come to the housing markets' rescue,” he said. “Mortgage interest rates in many cities aren't the major challenge for house buyers anymore. Many households simply lack the funds required to meet the banks' financing criteria, which we believe poses one of the biggest risks to property values in urban centers."

Matthias Holzhey, lead author of the study and Head of Swiss Real Estate Investments at UBS Global Wealth Management, says that investors should be cautious about investing in bubble-risk markets.

“Regulatory measures to curb further appreciation have already triggered market corrections in some of the most overheated cities. Real prices in all four top-ranking cities in the 2016 edition of the UBS Global Real Estate Bubble Index have fallen, for instance. On average they are down by 10% from their respective peaks and we don't see this trend reversing." He said.

Don’t take growth for granted
Real price appreciation in housing markets cannot be taken for granted the report warns.

The sure road to wealth accumulation is being disrupted by a shift of labour to the suburbs and, although underlying factors favouring city properties, including urbanization, the digital revolution and artificial supply constraints, still hold good, there are no guarantees of growth.

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