The risk of real estate bubbles has clearly diminished worldwide, but the cities of Zurich and Tokyo remain in the risk zone.
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After real estate prices have skyrocketed in many major cities in recent years and the risk of real estate bubbles increased, the situation has recently eased significantly again, as the UBS Global Real Estate Bubble Index 2023 published on Wednesday shows. While nine of the 25 cities examined were in the risk area last year, this year there are only two, namely Zurich and Tokyo.
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With a bubble risk value of 1.71, Zurich is at the top of the ranking and just ahead of Tokyo (1.65 points), with the bubble risk starting at 1.5 points. The cities of Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam and Tel Aviv have waved goodbye to the risk area within a year.
The study’s authors attribute the decline in risks primarily to the fall in real estate prices. On average, adjusted for inflation, these have fallen by 5% in the cities examined since mid-2022. “Many cities have lost price gains achieved during the pandemic. On average, real prices are now almost back to mid-2020 levels,” says Claudio Saputelli, head of real estate in the Chief Investment Office of UBS Global Wealth Management.
In addition to the high inflation in many countries, the significantly increased interest rates are responsible for the fall in prices. Real estate prices are likely to continue to fall in the longer term and thus the risk will also decrease again, the report states.
Zurich are one of a few cities where Real property prices have continued to rise in 2023, albeit more slowly than in previous years. Buyers currently pay 40% more for real estate than they did ten years ago. In return, rents only rose by around 12% over the same period. Because of this high imbalance between purchase prices and rents, there is still a risk of a bubble, it is said.
However, the discrepancy has narrowed somewhat recently, as rents have risen faster than property prices in recent quarters. Since there are slightly more properties on the market due to the increased interest rates, analysts do not expect any further price increases in Zurich for the time being. According to UBS experts, the bubble risk will gradually continue to decline over the next few years.
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