The latest annual UBS Global Real Estate Bubble Index highlights a turning point for housing markets worldwide, noting that the long-term outlook is being reshaped by macroeconomic forces, particularly global debt. UBS assumes that public debt, which is on a path to nearing 100% of global GDP by 2030, presents significant challenges for policymakers. These governments may be forced to rely on tools like allowing higher inflation or financial repression to manage their debt loads. However, these measures could provide a tailwind for assets like housing, making them more attractive to investors seeking refuge from devaluation, yet fueling new bubbles as prices decouple from fundamental values.

 

Global Bubble Risk and Price Disconnect

The report, which examines the bubble risk in 21 major global cities using metrics like price-to-income and price-to-rent ratios, notes that a widening gap between home prices and rental/income values is a precursor to housing crises. In metros with elevated or high bubble risk, inflation-adjusted home prices have increased significantly over the last five years, outpacing rent and income growth by substantial margins.

 

Globally, the average bubble risk in major cities has been decreasing for a third consecutive year, suggesting a slowdown from post-pandemic peaks. However, affordability remains strained, with average skilled service workers able to afford significantly less living space compared to before the global interest rate surge. A persistent housing shortage in many urban centers, reflected by rising rents, acts as a stabilizer, supporting demand for home ownership.

 

U.S. Metro Tracker

Among U.S. cities analyzed in the report, Miami continues to exhibit the highest bubble risk, driven by years of strong price appreciation and an average annual real price increase of nearly 7% over the last decade. This boom has slowed recently, but the disconnect between owner-occupied prices and rental values is pronounced. Los Angeles also falls into the elevated-risk category, grappling with limited supply and weak absorption of new units, contributing to acute affordability pressures.

 

In contrast, San Francisco and New York show relatively low bubble risk. San Francisco’s real prices have seen minimal growth over the last decade, with rental values actually declining in real terms and prices sitting below their 2022 peak. New York’s market has similarly cooled, with long-term real price and rental changes being slightly negative. Despite this, high-end properties continue to draw demand, and increased renter competition exists due to factors like return-to-office mandates.

 

Looking Ahead

The report suggests a solid outlook for housing as a long-term investment, particularly as central banks are expected to gradually lower policy rates, potentially reducing real financing costs. However, the high current price levels, coupled with elevated interest rates, pose sustainability concerns, especially in markets with high homeownership rates. The market’s future trajectory will largely depend on a potential easing of financing costs and the overall economic growth outlook.