A recent study by Swiss bank UBS reveals a significant drop in house prices across 25 major cities worldwide, reducing the risk of a real estate bubble.
House prices in major cities around the world have experienced a sharp decline, according to a study conducted by Swiss bank UBS. The study, which examined 25 of the largest cities globally, reveals that real house prices have fallen by an average of 5% and suggests that this trend is likely to continue. The report highlights that this correction in prices has significantly reduced the risk of a real estate bubble, a phenomenon that had a detrimental impact on the global economy during the 2008 financial crisis. Only two cities, Zurich and Tokyo, remain in the “bubble risk” category, down from nine cities last year. The report attributes the decline in housing market imbalances to factors such as the global economic climate, inflation, and interest rate surges.
The Evolution of Housing Bubbles
A housing bubble occurs when property prices rise rapidly and unsustainably due to increased demand and limited supply. However, when demand suddenly freezes or decreases, prices sharply drop, leading to the bursting of the bubble. The UBS report highlights that the current economic climate, which has witnessed a surge in inflation and interest rates over the past two years due to various factors like Russia’s invasion of Ukraine and the COVID-19 pandemic, has contributed to the decline in housing market imbalances.
The Impact of Economic Factors
Low financing costs have been a driving force behind the soaring house prices over the past decade. However, UBS points out that the end of the low-interest rate environment has had a profound impact on the housing market. From mid-2022 to mid-2023, real house prices in the 25 cities examined by UBS fell by an average of 5%. The cities experiencing the most significant decline were Frankfurt and Toronto, with prices dropping by 15%. Interestingly, both cities had the highest risk scores in last year’s UBS report. The authors of the report state that the sudden increase in financing costs has shaken the stability of the housing market.
Remaining Bubble Risks
According to the UBS report, only Zurich, where the bank’s headquarters are located, and Tokyo are still at risk of a real estate bubble. In the case of Zurich, real home prices continued to rise, albeit at a slower pace than in previous years. Rental growth also accelerated sharply and surpassed house price growth. However, the report suggests that with the supply of available housing returning to pre-pandemic levels and rising financing costs, further price upside is not expected.
Access to Housing Challenges
While cities like Paris and London have seen price corrections and reduced bubble risks compared to Zurich, UBS highlights that the fall in prices has not significantly improved access to housing. The report emphasizes that prices in these cities remain disconnected from wages, with the purchase of a 60 square meter home still representing 10 years’ annual salary for a qualified employee in the service sector. UBS suggests that further price declines are likely if interest rates remain high, although this could potentially aid in resolving the housing shortage.
Conclusion: The recent study by UBS reveals a significant decline in house prices across major cities worldwide, reducing the risk of a real estate bubble. While this decline is attributed to factors such as the global economic climate and interest rate surges, access to housing remains a challenge in cities like Paris and London. The report highlights the need for further price corrections to align housing prices with wages and improve affordability. As the housing market continues to evolve, it is essential to monitor the impact of economic factors and policy measures to ensure sustainable and accessible housing for all.
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