Some eurozone house markets face bubble risks

Persistently low interest rates in the eurozone have helped place some property markets in European cities into the overvalued territory for the first time, putting their home markets into danger, UBS has said.

The bank’s annual Global Real Estate Bubble Index has found Munich at the top of the list as the most vulnerable market to a bubble, with Toronto, Hong Kong, and Amsterdam, not far behind.

And although price increases have appeared to slow political uncertainty and a potential slowing global economy may be acting as a brake. Frankfurt stood out as the only global city to post double-digit home prices. Even in a slowdown, low-interest rates could still be pushing prices to unsustainable levels.

The survey doesn’t include any Irish city but may nonetheless throw new light into the property market here where prices have slowed dramatically but only after a number of years of rapid price increases following the crash. Ireland went through one of the worst ever recorded slumps when home prices collapsed after the balloon years leading up to 2007.

Many economists cite the failures of the damaged Irish building industry to build enough houses to meet demand. Prices have recovered strongly since the crash to potentially reach unaffordable levels for many people on average incomes.

“On a global level, economic uncertainty is outweighing the effect of falling interest rates on urban housing demand. However, in parts of the eurozone, low rates have still helped to push real-estate valuations into bubble-risk territory,” said UBS chief investment officer Mark Haefele.

The bank said Frankfurt, Vancouver, and Paris were “in bubble-risk territory as well”; property markets in Zurich, London, San Francisco, Tokyo, and Stockholm face “major imbalances”; and “valuations are stretched in LA, Sydney, Geneva, and New York”.

It is more confident about fair values in the housing markets in Singapore, Boston, and Milan, and Chicago is “undervalued”, it says.

For the first time in four years, London is no longer regarded as dangerously overvalued. Prices have been falling from their mid-2016 peak amid uncertainty over the UK’s exit from the EU and higher property taxes. The risk in Hong Kong, previously in pole position for a bubble, has also waned.

“The worldwide collapse in interest rates will not come to the housing markets’ rescue. 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 centres,” said Claudio Saputelli, head of real estate at the bank.

Lower interest rates have driven investors away from bonds and into other assets. That has helped drive up the prices of real estate in many cities, particularly in parts of the euro area where yields on sovereign debt have turned negative.

“Investors should remain cautious when considering housing markets in bubble risk territory. 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,” said lead author Matthias Holzhey.

UBS said: “Owning residential property in global cities has been a sure road to wealth accumulation.

“However, the absence of economic viability leads to a deterioration in many cities’ attractiveness and favours a shift in jobs to the suburbs. Even though the underlying factors favouring city properties, including urbanisation, the digital revolution, and artificial supply constraints, still hold good, real price appreciation can no longer be taken for granted.”

Additional reporting by Bloomberg