US cities including Miami and Boston see a high or increasing risk of bubbles forming in their real estate markets even as global real estate imbalances decline, according to a report from UBS Group AG.
Prices in Miami have risen nearly 50% since late 2019, fueled by a booming luxury market, with a risk of a bubble rising to ‘high’ this year and ranking first in a ranking of global cities, UBS economists say Matthias Holzhey and Maciej Skoczek wrote in the annual Global Real Estate Bubble Index published on Tuesday.
Tokyo and Zurich ranked second and third in their chances of a bubble, which UBS defines as a substantial and persistent mispricing of an asset, the existence of which cannot be proven unless it bursts. Overall global bubble risk has declined for a second year as higher interest rates drive corrections in many markets, including Paris and Hong Kong.
The housing markets are expected to regain strength
“Real home prices have bottomed out in many cities,” he wrote. “The economic outlook will determine the dynamics of future price developments more than in recent years.”
U.S. home prices rose as supply was tightened as buyers and sellers waited for lower interest rates. Muted transaction volumes are keeping supply tight as markets freeze in anticipation of better times, the report found.
European house prices fell the most as rising mortgage rates caused the markets to plummet. The strongest price corrections of 20% or more compared to post-pandemic levels were seen in cities such as Frankfurt, Munich, Stockholm and Paris, where there has been a high risk of a real estate bubble in recent years.
The number of building permits has decreased in most cities due to deteriorating financing conditions, while real rents have increased by more than 5% on average over the past two years. That reduced the financially affordable housing for a skilled service sector worker to an average of 40% less than in 2021, the report said.