The global risk of housing bubbles has significantly decreased in 2023, with only two cities, Zurich and Tokyo, remaining in the housing bubble risk category, according to the UBS Global Real Estate Bubble Index 2023 report. This is a marked reduction from nine cities that were classified as such in the previous year.
The report, released Wednesday, surveyed 25 cities and found that rising interest rates and global inflation over the past two years have led to a sharp decline in real estate market imbalances. The end of cheap financing in the real estate sector has resulted in inflation-adjusted international home prices experiencing their sharpest decrease since the 2008 global financial crisis.
Cities such as Tel Aviv, Hong Kong, Frankfurt, and Toronto, known for their chronically high housing prices, have exited bubble territory and are now merely classified as overpriced. Zurich leads the real estate bubble index with a score of 1.71, followed by Tokyo at 1.65. Miami, Munich and Frankfurt occupy the third to fifth positions.
Hong Kong's real estate bubble index reached 1.24 and dropped to the sixth position. Despite being at the bubble risk level since the commencement of the study, Hong Kong's inflation-adjusted house prices declined by 7% between mid-2022 and mid-2023, returning to their 2017 levels. Household leverage stabilized and rents remained virtually unchanged over the last four quarters due to an increase in population inflow.
However, high mortgage rates and a slow economic recovery in China have put pressure on housing demand in Hong Kong. UBS considers Hong Kong's property market as overvalued with rising inventories indicating potential weakness in the housing market in the near future.
In contrast to other cities where bubble risk decreased substantially, Miami remained the highest-ranked U.S. city in 2023 with a score of 1.38, just 0.13 index points below bubble risk territory. The city's housing prices have continued to increase above the U.S. average, attributable to its comparatively low income-to-house-price levels and population influx to the U.S. sun belt.
Los Angeles is the only other U.S. housing market, besides Miami, that UBS views as overvalued, but it has also become more affordable since last year. New York and San Francisco are now in the fair-valued category after experiencing Covid-19 and quality-of-life-related deflators on top of pressure from interest rates.
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