UBS Global Real Estate Bubble Index 2020: Munich and Frankfurt are the most overvalued housing markets globally
Zurich, 30 September 2020 – The UBS Global Real Estate Bubble Index, a yearly study by UBS Global Wealth Management's Chief Investment Office, indicates bubble risk or a significant overvaluation of housing markets in half of all evaluated cities.
The Eurozone stands out as the region with the most overheated housing markets. Munich and Frankfurt top the ranking. Paris and Amsterdam closely follow suit, treading on bubble risk territory alongside the two German cities. Similarly, Zurich, Toronto, and Hong Kong also display high imbalances.
In contrast to last year, Vancouver's housing market is now on the overvalued range of the spectrum, sharing the same territory with London, San Francisco, Los Angeles, and, to a lesser extent, New York. Boston, Singapore, and Dubai remain fairly valued. The same is true for Warsaw, which has been included in the study for the first time.
Chicago remains undervalued and is the only market on that end of the scale.
On average, inflation-adjusted annual price growth rates in the cities analyzed have accelerated in the last four quarters. In many European metropolitan areas, prices soared by more than 5%, with Munich, Frankfurt, and Warsaw leading the way.
Price growth in the Asian and American cities, with the exception of Sydney, remained in a low-to-mid single-digit range. Madrid, San Francisco, Dubai, and Hong Kong are the only cities that saw a decline in prices.
The last time there were fewer cities with negative price growth was in 2006.
Despite the pandemic, housing markets have remained resilient in the first half of 2020. The study discerns three main reasons for this outcome. First, home prices are a backward-looking economic indicator and are only able to reflect an economic downturn with a certain delay.
Second, the majority of potential home buyers did not suffer direct income losses in the first half of 2020. Credit facilities for companies and short-time work schemes mitigated the fallout from the crisis. Third, governments supported homeowners in many cities during the lockdown periods.
Housing subsidies were increased, taxes lowered, and foreclosure procedures suspended.
Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, said: “It is uncertain to what extent higher unemployment and the gloomy outlook for household incomes will affect home prices.
However, it’s clear that the acceleration over the past four quarters is not sustainable in the short run.
Rents have been falling already in most cities, indicating that a correction phase will ly emerge when subsidies fade out and pressure on incomes increase.”
High market valuations and an uncertain short-term outlook are bringing the longer-term trajectory of city housing into focus.
On the one hand, the key appreciation drivers of urban housing – superior employment opportunities and amenities, low financing costs, and limited supply growth – remain in place.
On the other hand, the pandemic seems to be accelerating a shift of population growth from cities to the wider metropolitan areas.
Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, explained: “The rise of the home office calls into question the need to live close to city centers.
Pressure on household incomes cause many people to move to more affordable suburban areas. Moreover, already debt-ridden or economically weaker cities will have to respond to this economic crisis with tax increases or public spending cuts, neither of which bode well for property prices.
Taken together, these factors amplify some longer-term uncertainties surrounding urban housing demand.”
Matthias Holzhey,lead author of the study and Head of Swiss Real Estate Investments at UBS Global Wealth Management, added: “The current cities at bubble risk seem to be weathering the coronavirus crisis relatively well.
The local economies in Munich, Toronto, and Hong Kong will ly recover quickly. But even in the absence of a broad market correction, the potential for further capital gains seems depleted.
In particular, the prospects for buy-to-let investments are poor given the record-high price-to-rent ratios.”
Zurich recorded the strongest price growth rate of all Swiss economic regions in the last decade. Its housing market has been characterized by a relatively fast supply expansion, with the vast majority of buildings ultimately being rented out.
The owner-occupied market has dried up, while the coronavirus crisis has hardly left any traces on it. In fact, housing located near Zurich's city center benefited from increasing demand. The high willingness to pay reflects both expectations that prices will further increase and sustained investment demand.
In line with these developments, the city now joins the bubble risk ranks.
Zurich also continues to top Geneva both on the price and index score. After the recent price increase, however, Geneva’s housing market has recovered from losses incurred during the period between 2013 and 2016.
Adding to this, low mortgage rates keep home-ownership appealing in light of inflated market rents and the city benefits from its international standing, while continuing to attract foreign nationals despite affordability constraints.
The index scores of all analyzed Eurozone cities increased in the last four quarters, with valuations already the highest worldwide. Imbalances are increasing further in the wake of record low financing costs that are not in line with the strength of the local economies. Most notably, prices in Frankfurt and Munich have more than doubled over the last decade.
On the contrary, London had the second-weakest price development of all analyzed cities since 2016.
Despite this, the city remains in overvalued territory but affordability issues, political uncertainty, and a tighter tax and regulatory environment are putting further pressure on house prices.
We expect foreign buyers to take advantage of the weaker pound and lower prices thus supporting the price level in the medium term.
The index scores have been relatively stable over the last five years in the East Coast cities. In contrast, the West Coast markets have developed less consistently. In Los Angeles the index scores have continued to increase, while in San Francisco valuations have declined due to falling home prices.
Overall, the drop of mortgage rates to historically low levels supports house prices in the US. But price changes in the analyzed cities trail the nationwide average. Inner-city demand growth has slowed down as citizens move out to the suburbs as a result of affordability issues and the impacts of COVID-19.
Continued migration to lower-cost and more tax-, business-, and regulatory-friendly states has accelerated this trend.
Over the last 30 years, Tel Aviv has seen some of the highest price growth among the cities covered in this report. Currently, house prices are on the rise again due to easier financing conditions and scarce housing supply. The government has lowered the purchase tax for second homes, encouraging housing market investments.
By contrast, Dubai's property market has reached a new cyclical low. Since the last peak in 2014, prices have fallen by over 35%, and the valuation score is close to depressed levels. Positive price effects of high population growth and easier mortgage regulations are being offset by ongoing high supply growth and weak oil prices.
Home prices both in Hong Kong and in Singapore were fairly stable during the first half of the year. But while real home prices in Hong Kong are over 50% higher than they were 10 years ago, prices in Singapore have remained virtually unchanged over this period.
Regulatory tightening has proven very effective in curbing price growth in the Lion City over the last decade.
The uncertain economic outlook is weighing on the market prospects in both cities, but in the medium term demand is ly to remain high given their respective key roles in the region.
Tokyo has evolved into one of the most dynamic housing markets in the region, bolstered by its strong population growth and attractive financing conditions. In Sydney, easier lending standards and the RBA’s rate cuts have kindled a modest but ly fleeting price recovery.
Source: UBS * Index altered due to data source revision
Maciej Skoczek Economist, Swiss Real Estate Investments Chief Investment Office GWM Tel. +41-44-234 68 09
Media release Download PDF
The Most Undervalued Cities in America – 2019 Edition
Sometimes it feels a good deal is hard to find, whether you’re buying a car or going out to dinner. That doesn’t change when you are considering where to live. Some towns just give you more bang for your buck, from the quality of life you’ll experience to the living costs you’ll incur.
And especially if you’re taking out a mortgage on a house, you’ll want to make sure you’re getting the best value you can. But getting good value from your city doesn’t always have to be difficult to attain.
With some patience and information, a smart investment in an undervalued property now could mean that your home becomes worth significantly more and nets you a tidy sum if you decide to sell it.
For those who aren’t experts in real estate, it can be difficult to figure out which parts of the country offer the best value. To that end, SmartAsset has once again assembled a list of the most undervalued cities in the country.
We analyzed 189 cities to find the most undervalued cities in America.
Our model considers data on unemployment rates, price per square foot, high school graduation rates, percentage of residents with a college degree, crime rate, entertainment establishment density, average days with precipitation, average number of days with bad weather and walk score. For more information on how we put together our final rankings, see the Data and Methodology section below.
This is our fourth annual study on the most undervalued cities in America. See the 2018 version of our study here.
- Consistency among undervalued cities. The most undervalued city in America is Pittsburgh for the second year in a row. All told, eight of the cities from last year’s top 10 finish in the top 10 this year, though the order has certainly shuffled.
- Look East. The Eastern United States rules this list. Six of the cities in the top 10 are East Coast cities, with several more close by. Three of the top 10 cities are in Pennsylvania alone. There are only two Midwestern cities and none in the Mountain West or the Pacific Coast in the top 10.
Pittsburgh, Pennsylvania tops this list for the second straight year. The Steel City has a high school graduation rate of 93%, the second-highest in the top 10 and a top-40 rate in the study overall.
Pittsburgh can also boast a population in which 37% of adults have at least a bachelor’s degree, a rate that leads the top 10 of our study and ranks 14th all 189 cities in our study.
Pittsburgh does not place as well for walk score, where it is the second-least walkable city in the top 10.
Zillow estimates that the price per square foot in Pittsburgh is around $104.50, but our model estimates homes should cost $262.79 per square foot, resulting in a surplus value of about $158. As you and your financial advisor scour the market for undervalued investments, Pittsburgh is an undervalued city that can give you the type of deals you crave.
2. Newark, NJ
Newark, New Jersey is the second city on our list and jumps up one spot from its place last year. Walkability is a great benefit of living in Newark – the walk score for the city is the best in the top 10, and fifth-best in the study overall. Newark does not fare as well for education.
Only 18% of its residents have at least a bachelor’s degree, the second-lowest percentage for this metric in the top 10, and its high school graduation rate of just 73% is the lowest in the top 10. Overall, our model suggests that living in Newark yields an estimated $155.
34 per-square-foot surplus in value.
3. New Haven, CT
New Haven, Connecticut is third on our list. The actual price of real estate in New Haven is $123.50 per square foot, according to Zillow, compared to a projected price of $275.49 our model. That’s a surplus value of almost $152.
New Haven also has a high school graduation rate of 89%, third-highest in the top 10 of this study. Furthermore, 29% of the population has at least a bachelor’s degree, the third-highest rate in the top 10 and 42nd all 189 cities in our study.
New Haven also has 2,243 dining and entertainment establishments per 100,000 residents.
4. Philadelphia, PA
In the fourth spot on our list is Philadelphia, Pennsylvania. Homebuyers in the City of Brotherly Love can purchase homes at around $117.17 per square foot, according to data from Zillow.
our overall model, living in Philadelphia is equivalent to living in a city where homes are worth $264.77 per square foot, which means the city is undervalued by more than $147.
Philadelphia has the second-highest walkability score in the top 10 and the sixth-highest in the study overall.
5. Baltimore, MD
Baltimore, Maryland is fifth on our list. According to Zillow, Baltimore has an actual home sale value of $106.83 per square foot, which is an undervaluation of approximately $116 compared to $223.07, the value our model projects.
It also has approximately 50 extreme temperature days per year, which is the second-lowest rate in the top 10 and a top-40 rate overall. Fans of moderate weather will ly find that appealing.
They’ll ly find the city’s top-15 walk score appealing as well.
6. Providence, RI
Coming in sixth place is Providence, Rhode Island. Providence has the third-lowest rate of violent crime in the top 10 of this list, at approximately 533 incidents per 100,000 residents.
It has 1,276 dining and entertainment establishments per 100,000 residents, the third-highest rate in the top 10 and 81st in the study overall.
It’s important for people to consider cost of living before moving somewhere, and according to Zillow data, Providence provides good value: the actual price per square foot for real estate in Providence is $164.33, compared to a projected price of $277.08. That yields an undervaluation of almost $113.
7. Chicago, IL
Chicago, Illinois is the seventh-most undervalued city in America, according to our study. Chicago is tied with Providence, Rhode Island for the third-highest walkability score in the top 10 and seventh-highest overall.
The actual price of real estate in Chicago is $171 per square foot, according to Zillow data, but our model estimates that homes should cost $282.84.
While Chicago does not score relatively well when it comes to violent crime rate, ranking in the bottom 20 for this metric overall, it does have a high school graduation rate of 85% and 676 dining and entertainment establishments per 100,000 residents.
8. Charleston, SC
Charleston, South Carolina comes in at No. 8 and ranks in the top half of the study for five metrics. There are only 24 extreme temperature days and approximately 65 days with precipitation each year, both of which are the lowest rates in the top 10. The violent crime rate in Charleston is around 283 incidents of violent crime per 100,000 residents each year.
Charleston’s walk score is the lowest in the top 10 and its concentration of entertainment and dining establishments is third-lowest in the study overall, but the city’s unemployment rate is 3.2%, a top-50 rate. According to Zillow, the actual cost of real estate is $187.25 per square foot, but our model estimates homes should cost $289.
24 per square foot, yielding a surplus value just shy of $102.
9. St. Louis, MO
St. Louis, Missouri, coming in at ninth place, is the westernmost city in our top 10. St. Louis does have the fourth-highest high school graduation rate in the top 10, at 88%, which ranks 91st in the study overall.
Furthermore, 28% of the adults in the city’s population have at least a bachelor’s degree, the fourth-highest rate in the top 10 and 61st 189 cities overall. The unemployment rate in St. Louis is 3.
9%, the second-lowest rate in the top 10.
Zillow data shows that actual cost per square foot in St. Louis is $104.25, while our model estimates that it should cost about $100 more than that, at$205.58. For those looking to get a smart start, it’s also one of the best cities for new college grads.
10. Allentown, PA
Taking the 10th spot in our list is Allentown, Pennsylvania. Allentown has just 461 incidents of violent crime per 100,000 residents each year, which ranks the second-lowest in the top 10 of this study and 84th in the study overall.
Allentown also has 1,042 dining and entertainment establishments per 100,000 residents, the fourth-highest concentration in the top 10 and 96th overall. Actual cost per square foot in Allentown is $92.17 according to Zillow data, while our model estimates that it should be $190.
73, yielding an undervaluation of $98.57.
Data and Methodology
To determine the most undervalued cities in America, we created a model to project home values various quality-of-life metrics. We collected data for nine metrics for 189 of the largest cities in the country. Specifically, we compared the cities across the following metrics:
- Home value per square foot. Data is from Zillow and is for 2018.
- Violent crime rate per 100,000 residents. Data comes from the I’s Uniform Crime Reporting tool and is for 2017.
- High school graduation rate. Data comes from the U.S. Department of Education EdFacts and is for the 2016 – 2017 school year.
- Number of extreme temperature days. This is the average number of bad weather days a city has in a year. To measure this, we found the average number of days where the temperature exceeds 90 degrees or is under 40 degrees. Data is a 30-year average from 1981 – 2010. Data comes from the National Oceanic and Atmospheric Administration.
- Average number of precipitation days per year. This is the average number of days per year with at least 0.1 inches of precipitation. Data comes from the National Oceanic and Atmospheric Administration and is the 30-year average from 1981-2010.
- Walkability. This is a measure of how walkable a city is. Data comes from walkscore.com
- Percentage of population with a bachelor’s degree or higher. Data comes from the U.S. Census Bureau’s 2017 1-year American Community Survey.
- Unemployment rate. Data comes from the Bureau of Labor Statistics local area unemployment statistics. It is the average of the unemployment rates between January 2018 and February 2019.
- Concentration of dining and entertainment establishments. This is the number of dining and entertainment establishments per 100,000 residents. Data comes from the Census Bureau’s 2017 Zip Codes Business Pattern Survey.
To model home value per square foot, we ran a linear least squares regression with home value per square foot as the dependent variable and using the eight quality of life metrics as explanatory variables. Below is the formula to measure estimated dollars per square foot:
Home value per square foot = 41.71 – (0.05 * violent crime rate) + (1.57 * average high school graduation rate) + (5.56 * dining and entertainment establishments per 100,000 residents) – (2.
47 * average number of days of significant precipitation per year) – (1.45 * number of days with extreme high or low temperatures per year) + (3.03 * percentage of the population with a bachelor’s degree or higher) + (5.
26 * walk score) – (21.07 * unemployment rate).
The above formula may seem complicated, but it is actually quite easy to read. For example, we see that in our formula walk score is multiplied by 5.26 (this figure is known as the coefficient). This means that if a city’s walk score improves by 1, assuming all other metrics remain constant, the projected home value per square foot would increase by $5.26 per square foot.
We can see how overvalued or undervalued a city is by plugging our data back into our formula. By plugging the collected data back into our model, we get a projection for home value per square foot, which we can then compare to the Zillow data.
In order to create our final rankings, we subtracted the estimated value per square foot by the actual Zillow value per square foot.
The city with the largest positive difference ranked first while the city with the largest negative difference ranked last.
In order to create our model, we only included quality of life metrics. We left out other potentially explanatory variables population change and new home change. Because of this, these figures are not meant as a prediction.
Getting the Most Your Money
- Expert advice wherever you are. No matter where you are considering buying property, expert help isn’t hard to find. Connect with a financial advisor using SmartAsset’s free financial advisor matching service. You answer a few questions, and we match you with up to three advisors in your area, all fully vetted and free of disclosures.
From there you talk to each advisor and make a decision about how best to move forward.
- Mortgage forecast. Getting a mortgage is one of the most important parts of buying a home. See what your mortgage payment might look with SmartAsset’s free mortgage calculator.
Questions about our study? Contact press@smartasset.
Photo credit: ©iStock.com/Sean Pavone