In an environment of accelerating inflation, an energy crisis, severe market turmoil and, above all, a catastrophic war with global repercussions, this is compounded by the move of major central banks to restrictive monetary policy, which is risky on many levels. Parallel and in many cases escalating interest rate hikes are taking a toll on affected economies around the world, but above all they threaten the real estate market, which has been experiencing breakneck growth and rising prices in major urban centers for a decade now. In a short period of time, they make the cost of servicing mortgages unaffordable and make it even more difficult to buy a home for those for whom prices are already too high. All this is happening now, after the past two years, during which the pandemic and the funds accumulated in bank accounts during the quarantine have dramatically increased the demand for housing and business space, further inflating a new brewing “bubble” in the real estate market.

Documenting events and anticipating the coming turmoil in real estate markets in the world’s metropolitan areas, UBS highlights in its respective report the role that cheap money has played in the past decade, combined with the growing demand for housing in large cities around the world. As he notes, historically low interest rates have caused real estate prices to soar to levels that have surpassed even the most optimistic forecasts of owners. UBS estimates that in the year from mid-2021 to mid-2022, home prices in major cities rose by 10%, the highest increase since 2007.

From mid-2021 to mid-2022, home prices in major cities rose by 10%.

While four of the five cities with the fastest rising property prices are in the US, Miami, Los Angeles, San Francisco and Boston, UBS sees no risk of a real estate bubble in the superpower. In Europe, by contrast, he assesses the risk of a real estate bubble by listing house prices in four European metropolitan areas: Frankfurt, Zurich, Munich and Amsterdam. Tel Aviv and Tokyo have been added to the list of metropolitan areas facing a housing bubble for the first time since reports began in 2015. Rising house prices have been accompanied by a corresponding surge in household debt in major cities, reflecting cheap money, as well as the economic downturn caused by the pandemic. Mortgage loans have shown the biggest growth on record since 2008, according to UBS.

The problem, however, is that the situation is changing dramatically, as mortgage interest rates have nearly doubled on average in most major cities from last year to today, making housing virtually unaffordable. Looking at other parameters, UBS concludes that at current prices, the average service worker can now buy a house equivalent to 1/3 of what he would have bought before the pandemic. However, deteriorating economic conditions have already led to some correction in property prices, which have started to decline in most major cities or are expected to decline over the next year.

7% increase in rental prices during the year

The same factors that pushed property prices skyrocket have led to rent increases that are well above pre-pandemic levels in every major city except Tokyo.

Over the past year, UBS has seen an average 7% increase in rents, an increase that it notes more than offsets any rents or rentals that homeowners lost during the first year of the pandemic. In recent years, platforms like Airbnb have become a catalyst in European urban centers and larger cities in general, attracting large numbers of visitors as they encourage owners to seek profit maximization and charge prohibitive rents to make their properties long-term rentals.

After all, rents have been rising at nearly the same rate they were rising before the pandemic, which shows that urbanization has not slowed down, according to UBS. As he points out, this trend is stronger in US cities, as well as in Dubai and Singapore, where housing demand has skyrocketed mainly due to increased immigration and events caused by the pandemic. However, housing prices again continued to rise at a faster pace than rents.

Reiterating the catalytic role of low interest rates over the past 10 years, UBS notes that home prices have become completely decoupled from income and rent. Adjusted for inflation, he calculated that over the past ten years, house prices have risen by an average of 60%, while real incomes and rents have risen by only 12% over the same period. As a result, the only pillar that is still propping up the housing market and keeping prices high is nothing less than strong demand in the labor market. After the pandemic and the widespread phenomenon of the so-called “great resignation”, the demand for labor in all sectors of the economy has acted as an amplifying factor. But this determinant seems to be under threat due to the events of the past year, which have already led to a correction in house prices, at least in areas that are in danger of a bubble due to excessively high values.

The meaning of the roof from Amsterdam to Milan is overrated

In Europe, the cities most at risk of a real estate bubble are Frankfurt and Munich, as prices in the two German cities have more than doubled in the last ten years. Of course, they tend to slow down as growth was capped at 5% in the twelve months from mid-2021 to mid-this year. In Munich, in particular, the extremely low affordability of housing has been a decisive factor in rising prices, while the number of workers in the city has increased significantly. However, the looming recession in the German economy is expected to limit demand for housing, and higher interest rates will also increase the cost of servicing mortgages. UBS estimates that today the average paid worker can buy an apartment in Munich for one room less than before the pandemic.

A smaller but notable risk of a real estate bubble is seen in Amsterdam, where property prices have risen the most of any city in the eurozone. From mid-2021 to mid-2022, prices increased by 17%. However, they were preceded by a doubling during the last decade. Demand for housing in the Dutch city does not seem to be declining much after the increase in mortgage interest rates, which rose notably less than in other eurozone metropolitan areas.

Another case is Madrid, where real estate prices have begun to rise at an accelerated pace since the start of the pandemic. Property prices are clearly inflated in the Spanish capital, although UBS believes that an average-paid worker can still buy much more space there than his counterpart in any other city in the eurozone.
In Milan, along with a recovery from the pandemic downturn and low interest rates, financial stimulus provided by the previous government to refurbish buildings contributed to a significant increase in house prices. These incentives remain in place, the subway is almost ready, and the 2026 Olympics are just around the corner.

All these factors are pushing up prices in the financial capital of Italy. An exception among major European cities is the capital of France. Prices in Paris remained unchanged for twelve months from the middle of last year to the middle of this year, lowering home prices in the rest of the country accordingly. During the same period, rents also remained flat and at a low level, although incomes recovered and rose. So the housing market in the French capital is not in the danger zone for a real estate bubble, although its real estate is quite overvalued. What’s more, Paris remains the most expensive and least accessible metropolitan area in the eurozone.

Difficulties

Considering it unlikely that the 2007-style US housing market crash would repeat itself, Mark Zady, chief economist at Moody’s Analytics, predicted that “housing prices will not collapse, but people will try to own a house to increase income.” his wealth. But the younger ones will face great difficulties.”

Beneficiaries

Nicole Lux, chief executive of Bayes Business School, predicts that “this whole situation will lead to forced sales by owners of commercial and residential real estate in favor of wealthy investors who will be able to take advantage of the situation.”

turmoil

Osman Malik, head of real estate at UBS Investment Research, predicts real estate market turmoil as central banks shift to restrictive monetary policy and stresses that “probably the real estate market has not yet realized that the era of cheap money is over, and what this entails. behind you.”