Bankers are warning that house prices are too high despite years of correction since the credit crunch – and that another bubble may burst pushing the global economy off course again.
The problem, say experts as Swiss bank UBS, is that a bubble is only spotted on bursting but if historic events that led to a previous bubble are repeated, then another is probably on the way.
However, UBS has looked at house prices in 18 major cities around the world and has concluded property is overvalued in most.
The city with property most at risk of a bubble bursting is Vancouver, Canada, says the report.
Other cities at serious risk include London; Stockholm, Sweden; Sydney, Munich and Hong Kong.
Prices outstrip incomes
Overvalued are San Francisco; Amsterdam; Zurich; Paris, Geneva, Tokyo; and Frankfurt, while Singapore; Boston; New York are fairly priced and homes in Milan and Chicago are undervalued.
UBS explains in the latest Global Real Estate Bubble Index that prices are benchmarked against the number of years a skilled service worker needs to save to buy a 60 square metre flat near a city centre.
“Buying a 60 square metre apartment exceeds the budget of most people in most world cities who earn the average annual income in the highly skilled service sector,” says UBS.
“In Hong Kong, even those who earn twice the average income would struggle to afford an apartment of that size. House prices have also decoupled from local incomes in London, Paris, Singapore, New York and Tokyo, where price-to-income multiples exceed 10.
“Unaffordable housing is often a sign of strong investment demand from abroad and tight rental market regulations. If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink.”
As for Vancouver and Zurich, UBS considers property is so expensive that the housing market depends on low interest rates.
In Vancouver, home prices have seen a 25% rise in just under two years.
UBS says a weak Canadian dollar has encourages Asian investors. To try to slow the market, an additional property tax has been introduced locally to deter non-residential buyers.