In a world in which more than a third of all government bonds offer negative yields, investing in tangible assets remains popular. So it is hardly any wonder that major urban housing markets are again overheating, just a few years after the last major wave of global correction. We see a significant overvaluation of housing in some key financial centers, with six markets in bubble risk territory.
Although cities at risk of a bubble may not experience a crash, investors should still bear in mind the significant chance of a correction over the medium term.
In the six cities that we see as most at risk of a bubble – Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong – house prices have increased by almost 50 percent on average since 2011. In the other financial centers, prices have only risen by less than 15 percent. This gap is out of proportion to differences in local economic growth and inflation rates.
The discrepancies have emerged out of a mix of optimistic expectations, capital inflows from abroad and loose monetary policy. The weak economic foundations of the latest price boom make the housing markets in those cities vulner¬able.
In North America, the housing market recovery after 2010 has been very uneven. In San Francisco, real prices have increased by more than 50 percent since 2011 and the market seems – despite the fast growth of the local economy – on a path towards bubble risk. Meanwhile, real price growth in Boston has remained close to the national average of 15 percent in the last four years, while New York and Chicago have been outpaced by the overall U.S. market.
While the slow recovery in Chicago can be attributed to fiscal problems and a comparatively weak local economy, the recent price growth deceleration in New York is a sign of weakness of the financial sector. Overall, New York and Boston seem fairly valued while Chicago is undervalued.