Editorial

Low financing costs have been the lifeblood of global housing markets over the past decade, driving home prices to dizzying heights. However, the abrupt end of the low interest rate environment has shaken the house of cards. On average of all cities, within the past year, inflation-adjusted home prices have seen the sharpest drop since the global financial crisis in 2008. Cities that have been classified in the bubble risk zone at least once in the past three years recorded an even stronger average price decline. But the impact of higher interest rates has varied markedly across cities, with the price correction depending on several other factors as well.

Where home financing was already at the limit of affordability with low interest rates, higher interest rates almost inevitably led to a slump in local demand. If a market was characterized by a significant decoupling of purchase prices from rents, the rise in mortgage rates shifted demand back to the rental market. In housing markets that were predominantly short-term financed, owner households immedi- ately felt the higher financing costs and were forced to accept lower prices when selling. Where buy-to-let became popular during the low interest rate period, fire sales due to higher interest rates and slumping profitability intensified a correction. In cities where several of these factors came together at the same time—as in Toronto, Frankfurt, and Stockholm, for example—re-pricing took place all the faster and more severely.

In this issue, find out in which cities property prices and valuations have fallen the most, where (further) corrections are imminent, and where price increases are continuing or could happen in the future. We hope you enjoy reading it.

Key results

Prices in reverse gear

Most analyzed urban centers have seen a real house price drop during the last four quarters. In cities at bubble risk during the last three years, property prices have declined by 10% on average.

Fewer cities at bubble risk

Risk scores have dropped sharply in most cities in recent quarters.
High imbalances persist in Zurich and Tokyo—relatively low mortgage and inflation rates have not caused any market disturbance there.

Tight financing conditions

Financial affordability of housing has collapsed as mortgage rates have roughly tripled since 2021 in most markets. Therefore, household leverage has been declining in most countries in recent quarters.

Inflation as game-changer

Inflation made a decisive contribution to the reduction in imbalances. While rising interest rates put pressure on house prices, inflation supports income and rental growth. The latter has accel- erated in most cities outside the US and reached the highest value in almost a decade.

Too early for turnaround

There is more downside in real house prices. However, a housing shortage has set the stage for a renewed boom in many cities—if interest rates fall.

Defying gravity

The most sought-after destinations in recent years are Singapore, Dubai, and Miami. In those hotspots of interna- tional demand, rental and for-sale price growth clearly stand out. Prices are up as much as 40% and rents 50% higher than two years ago.

Deflating bubbles

The global surge in inflation and interest rates over the past two years has led to a sharp decline in imbalances in the hous-ing markets of global financial centers on average, as measured by the UBS Global Real Estate Bubble Index. In this year’s edition, only the two cities Zurich and Tokyo have remained in the bubble risk category, down from nine cities a year ago. Formerly in the bubble risk zone, Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv saw their imbalances decline and are now in the overvalued territory. Housing markets in Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney are overvalued as well.

Also, New York, Boston, San Francisco, and Madrid have expe- rienced a drop in imbalances. These markets are now fairly valued, according to the index, as are Milan, São Paulo, and Warsaw. Singapore and Dubai are fairly valued as well, even though their reputation as geopolitical safe-havens has recently triggered a surge in demand for both renting and buying there. Price corrections across the board House price growth has suffered due to rising financing costs as average mortgage rates have roughly tripled since 2021 in most markets. Annual nominal price growth in the 25 cities analyzed has come to a standstill after a buoyant 10% rise a year ago. In inflation-adjusted terms, prices are even 5% lower now than in mid-2022. On average the cities lost most of the real price gains made during the pandemic and are now close to mid-2020 levels again.

Regional focus

Eurozone

The house price level in both German cities analyzed, Frankfurt and Munich, doubled between 2012 and 2022, which was the strongest growth of all cities included in the study. Solid economic and employment growth, falling mortgage rates, strong investment demand, and supply shortages supported higher prices. But prices have been overshooting, in our view. Rate hikes and high inflation triggered a revaluation. Peaking in early 2022, real prices in Frankfurt have corrected by almost 20% since then (see spotlight Frankfurt p. 17), and by 15% in Munich. Both cities have left the bubble risk zone, but remain highly overvalued. The correction is still ongoing.

Prices in Amsterdam rallied by almost 20% in inflation- adjusted terms between 2020 and mid-2022 alone, decou- pling from local rents and incomes. The UBS Global Real Estate Bubble Index was flashing warning lights. Over the last four quarters, prices have fallen by 14%—the strongest annual correction since the 1980s. Several factors have simultaneously weighed on owner-occupied demand: worsening financing conditions, inflation diminishing households’ purchasing power, and their willingness to buy a home, as well as the reduction of the gift allowance for home ownership. More- over, a higher transfer tax and prohibition of renting out after the purchase have decreased investment demand. The market is now in overvalued territory, accroding to the index.

Falling mortgage rates and strong international demand were the main drivers of a 30% real house price increase in Paris between 2015 and 2020. The city became less affordable and bigger flats for families were in short supply. People left France’s capital city, rendering its population 5% lower than a decade ago. Prices started falling in 2021. The decline has accelerated in recent quarters as higher mortgage rates, lending restrictions, and a property tax hike dampened buyer activity. Overall, real prices corrected by 8% over the last four quarters, the strongest decline in almost three decades, pushing the city into overvalued territory. Madrid’s housing market is in fair value territory. Compared to other Eurozone cities, the Spanish capital has remained affordable as measured by the price-to-income ratio. After a three-year period of stagnation, prices increased by 3% in inflation-adjusted terms over the last four quarters. Overall, they remain 25% below the all-time high in 2007. Demand is shifting to the rental market as higher interest rates reduce the attractiveness of purchasing property. More build-to-rent developments are expected, keeping the market in balance. Milan’s housing market has recorded rising prices since 2018. Falling mortgage rates, a robust economy, new developments, and a favorable tax regime supported housing demand. Though nominal prices continued to rise between mid-2022 and mid-2023, they could not keep up with inflation. Real prices dropped by 2%, in line with local real rental and income growth. We think the market remains fairly valued, virtually unchanged from last year. Solid prospects for the local economy, an extension of the underground railway, and the upcoming 2026 Olympic Winter Games all contribute to sustaining valuations in nominal terms.

Rest of Europe

Buying owner-occupied real estate in Zurich now costs over 50% more than a decade ago in nominal terms. An increasing number of high-income earners and ultra-low interest rates supported rising prices. The price level has not yet adapted to increased financing costs. The market is in the bubble risk zone (see spotlight Zurich p. 16).

By contrast, house prices in Geneva are less than 20% higher than ten years ago. Between mid-2022 and mid-2023, real prices stagnated. The risk score is far lower than in 2013, when the market was in bubble risk territory. Although the Rhone-city benefits from its international status, the economic outlook is mixed, and population growth remains subdued as out-migration to more affordable regions is significant. How- ever, new building permits are only about half their 10-year average, supporting price levels in the medium term.

Real prices in London’s housing market have been on a downward path since Brexit in 2016. Despite structural supply shortages, prices have lagged the nationwide average. In the absence of strong international demand, house prices remain under pressure as—due to high mortgage rates—local afford- ability is at its worst since 2007. Additionally, demand for buy- to-let investments has abated: Although rents have increased in nominal terms, they could not offset rising financings costs. The market remains in overvalued territory, in our view (see spotlight London p. 18).

Between 2008 and 2021, falling mortgage rates have sup- ported demand for owner-occupied homes and led to a sharp rise in Stockholm’s real housing prices by almost 70%. The surge was much faster than that of local incomes and rents, as well as housing prices in other parts of the country. Exces- sive housing valuations and a high reliance on variable-rate mortgages turned out to be a dangerous cocktail. Currently, affordability is stretched and as a result, between mid-2022 and mid-2023, inflation-adjusted prices corrected by over 20%—more than in any other city analyzed. The market slid from bubble risk to overvalued territory. That said, demand for owner-occupied housing is likely to shoot up again as soon as affordability improves. The overregulated and undersupplied rental market is not a viable alternative for many prospective owners.

Real house prices in Warsaw increased by almost 40% between 2012 and 2022. The city attracted new citizens and buy-to-let investors alike. Strong employment prospects, a subway expansion, and modern housing developments kept the market attractive. Against a backdrop of strong and persistent inflation, mortgage rates spiked, reducing households’ willingness to pay for homes. This has led infla- tion-adjusted prices to decline about 10% within a year and moved demand to the rental sector, which is seeing strong growth. However, new mortgage subsidies are about to trigger a buying frenzy.

United States

As a result of the sharp rise in mortgage rates and record-low affordability, housing demand has weakened significantly in the US cities we analyzed. But income growth, a lack of avail- able for-sale inventory, and a strong labor market have pre- vented a meaningful correction in home prices. Nevertheless, inflation-adjusted prices fell on average of all analyzed US cities by 2% between mid-2022 and mid-2023, in stark contrast to an increase of almost 10% a year ago. Additionally, real rental growth slowed substantially as the pandemic-induced demand receded, new supply was delivered in several markets, and vacancy rates bottomed out.

While imbalances in Miami and New York increased over the last four quarters, housing markets in Boston, San Francisco, and Los Angeles recorded lower index scores.

Housing prices in Miami continued to increase faster than the nationwide average. The price level has more than doubled over the last 10 years. Miami is the main beneficiary of the increased attractivity of sun belt cities in the US. Demand is bolstered by continued population influx and the still relatively low absolute price level compared to incomes. Having said that, sales numbers have dropped and the upward pressure on prices has eased as mortgage rates went up.

New York is in the middle of a strong comeback following the market’s significant weakness during the pandemic’s lockdowns as many inhabitants left the city for less dense, more affordable areas. After multiple years of eroding values, real prices in the city’s housing market increased by 3% between mid-2022 and mid-2023, outpacing the national average for the first time since 2016 (see spotlight New York p. 19).

Conversely, Boston’s housing market dynamics have weakened. Inflation-adjusted prices corrected slightly between mid-2022 and mid-2023 while rents remained roughly stable. The mar- ket is less synchronized with the rest of the US due to its high dependency on startups, technology, and healthcare—which recently underperformed and thus were less supportive for housing demand. Overall, the market is fairly valued, in our view.

The rebound on the San Francisco real estate market was short-lived. Since mid-2022, prices have fallen 10% and rents dropped 3% in inflation-adjusted terms. The market is now fairly valued, in our view. San Francisco is under pressure from quality-of-life issues, elevated hybrid work patterns, and com- petition with sun belt cities that attract technology companies. Building permits are at their lowest in a decade, but vacancy rates have remained elevated.

Imbalances in the Los Angeles housing market have slightly softened, but the market remains overvalued, in our view. Los Angeles is suffering from a broad loss of economic com- petitivity due to its significant exposure to the technology and entertainment sectors, quality of life challenges, adverse tax legislation, and high costs of living. As income growth disap- pointed and housing affordability deteriorated, inventory levels have begun to climb.

City benchmarks

Dubai’s real estate sector is embracing technological advancements to redefine industry practices and enhance overall efficiency. Blockchain technology, in particular, has gained prominence in property transactions. The implementation of blockchain ensures transparency, security, and efficiency in real estate dealings, reducing the potential for fraud and streamlining the entire process. Beyond blockchain, Dubai is actively pursuing smart city initiatives. The integration of Internet of Things (IoT) devices and data analytics is creating intelligent and connected urban spaces. These technological interventions not only improve the management of city infrastructure but also contribute to a more seamless and enjoyable living experience for residents. The adoption of technology extends to various facets of real estate, from construction and project management to property management and customer service. By staying at the forefront of technological innovations, Dubai’s real estate market is positioning itself as a modern, tech-savvy industry leader.

Canada

A combination of strong population growth, attractive financ- ing conditions, high investment demand, and an urban supply shortage have fueled the housing bonanza in Vancouver and Toronto for almost a quarter of century. Real prices more than tripled in these cities between 2000 and 2022. For years, both markets were flashing warning signals as local price levels decoupled from the countrywide average and clearly outpaced rental growth. During the pandemic, the housing boom became a countrywide phenomenon as strong income growth supported upsizing and mortgage rates continued to trend downward. Overall, between mid-2019 and mid-2022, real prices in Vancouver increased by 25% and by almost 35%
in Toronto, while household leverage rose at a fast pace.

In such a heated market environment, it doesn’t take much for sentiment to change quickly: A mix of increasing financing costs and higher mortgage stress test rates tipped the scales. Outstanding mortgage growth in Canada has slowed to the

lowest level since the beginning of the boom in 2000. The number of housing sales has dropped almost 40%, reaching its low at the beginning of 2023. Price levels in Vancouver and Toronto have corrected by more than 10% in inflation-adjusted terms since mid-2022. We now rank these markets in overval- ued territory.

As demand for living space in these cities is rising steadily, the pressure is shifting to the rental market. In Vancouver, real rents have climbed around 10% compared to a year ago, while they are a good 5% higher in Toronto. Both cities were showing signs of housing market recovery in the spring with increasing numbers of transactions and positive price growth. Nevertheless, it is premature to speak of a turnaround against the backdrop of recent interest rate hikes from the Bank of Canada

Asia Pacific

Between 2003 and 2018, real house prices in Hong Kong nearly quadrupled while incomes stagnated and rents increased by just 50% in inflation-adjusted terms. Housing is barely affordable: A skilled service worker requires more than 20 times the average annual income to buy a 60 sqm flat. The city has constantly been at bubble risk levels since the first edi- tion of this study in 2015. After declining 7% between mid- 2022 and mid-2023, inflation-adjusted house prices in Hong Kong are back to levels last seen in 2017. Household leverage stabilized and rents have been virtually unchanged in the last four quarters as population inflow increased. However, high mortgage rates and a slow economic recovery in mainland China put pressure on house demand. Overall, we now see the city in overvalued territory. Rising inventories are a sign that weakness on the housing market is going to persist in the near future.

Singapore’s housing supply cannot keep up with strong local and international demand, which began rising significantly in 2018. Real prices have risen by 15% since then, despite regu- latory tightening. However, this has been put into perspective by rents, which have shot up by roughly 40% in the same period. Overall, the housing market is fairly valued, in our view (see spotlight Singapore p. 20).

Housing market imbalances in Tokyo have increased from undervalued 20 years ago to bubble risk now. Real estate prices have been rising almost continuously for over two decades and decoupled from the rest of the country, bolstered by attractive financing conditions and population growth. International investors have been attracted by the defensive qualities of Tokyo’s residential market, heating up the price growth. Moreover, as net immigration has weakened since the pandemic, rents started to fall in 2020, aggravating imbal- ances. Widespread home offices and higher availability of larger units made people leave the city center. Although income growth could not keep pace with prices and mortgage rates have increased (moderately) in recent quarters, nominal house prices dynamics have not weakened.

The housing market in Sydney has been very volatile in recent years. After a brief period of market weakness between 2018 and 2019, prices surged by almost 25% cumulatively across 2020 and 2021. Aggressive rate hikes by the Reserve Bank of Australia more recently triggered a new sharp price correction. Inflation-adjusted prices are back to 2018 levels. Further downside is limited though, as foreign demand has been improving. Amid robust rental growth and lower household leverage, imbalances have declined sharply. The market is classified at the lower end of the overvalued territory.

Middle East

With housing prices sliding for seven straight years, the mar- ket for owner-occupied housing in Dubai started recovering in 2021. The risk score has dropped significantly over the course of this 10-year period. In the last four quarters, housing prices increased by a double-digit rate. Given strong income growth and a red-hot rental market, with rental growth even surpass- ing owner-occupied price growth, we see the market as fairly valued. While Dubai is highly cyclical and prone to overbuild- ing, price momentum should remain strong in the coming quarters (see spotlight Dubai p. 21).

Between 2002 and 2022, real house prices in Tel Aviv tripled, the highest growth of all cities we analyzed. Backed by falling interest rates and accompanied by a housing shortage, the housing price level in the city decoupled from the rental market and prices in the rest of the country. Household incomes could not keep up with prices, leading to stretched affordability. It is no surprise, that rising mortgage rates during 2022 ended the party. Mortgage volume growth has more than halved since last year. As a result, real price growth was negative in the first half of 2023. This moderate easing will likely continue as there are no signs of a demand rebound. Moreover, past efforts by the government to increase housing supply may backfire now, because unsold inventories have been piling up amid a full construction pipeline.

Brazil

The period of sharply rising real estate prices in São Paulo came to an abrupt halt in 2014. An economic recession, strong housing supply expansion, and rising mortgage rates triggered price declines. Since then, inflation-adjusted housing price growth has continuously remained in negative territory and has stabilized only in recent quarters, roughly 25% below the peak. While the willingness to pay has been supported by a recovery of household incomes after the pandemic, double- digit mortgage rates have suffocated demand for owner- occupied housing. Hence, many have switched from owning to renting, leading real rents to rise by almost 10% in the last four quarters. This puts the market in fairly valued territory, in our view. But the tide might be turning. Inflation is coming down and the central bank has already started a new period of monetary easing. Although economic growth will likely slow down, gradually improving financing conditions could boost the housing market in the coming quarters.

City spotlights

Dubai’s real estate sector is embracing technological advancements to redefine industry practices and enhance overall efficiency. Blockchain technology, in particular, has gained prominence in property transactions. The implementation of blockchain ensures transparency, security, and efficiency in real estate dealings, reducing the potential for fraud and streamlining the entire process.
Beyond blockchain, Dubai is actively pursuing smart city initiatives. The integration of Internet of Things (IoT) devices and data analytics is creating intelligent and connected urban spaces. These technological interventions not only improve the management of city infrastructure but also contribute to a more seamless and enjoyable living experience for residents.
The adoption of technology extends to various facets of real estate, from construction and project management to property management and customer service. By staying at the forefront of technological innovations, Dubai’s real estate market is positioning itself as a modern, tech-savvy industry leader.

City overview

Dubai’s real estate sector is embracing technological advancements to redefine industry practices and enhance overall efficiency. Blockchain technology, in particular, has gained prominence in property transactions. The implementation of blockchain ensures transparency, security, and efficiency in real estate dealings, reducing the potential for fraud and streamlining the entire process.
Beyond blockchain, Dubai is actively pursuing smart city initiatives. The integration of Internet of Things (IoT) devices and data analytics is creating intelligent and connected urban spaces. These technological interventions not only improve the management of city infrastructure but also contribute to a more seamless and enjoyable living experience for residents.
The adoption of technology extends to various facets of real estate, from construction and project management to property management and customer service. By staying at the forefront of technological innovations, Dubai’s real estate market is positioning itself as a modern, tech-savvy industry leader.

Methodology & Data

Dubai’s real estate sector is embracing technological advancements to redefine industry practices and enhance overall efficiency. Blockchain technology, in particular, has gained prominence in property transactions. The implementation of blockchain ensures transparency, security, and efficiency in real estate dealings, reducing the potential for fraud and streamlining the entire process.
Beyond blockchain, Dubai is actively pursuing smart city initiatives. The integration of Internet of Things (IoT) devices and data analytics is creating intelligent and connected urban spaces. These technological interventions not only improve the management of city infrastructure but also contribute to a more seamless and enjoyable living experience for residents.
The adoption of technology extends to various facets of real estate, from construction and project management to property management and customer service. By staying at the forefront of technological innovations, Dubai’s real estate market is positioning itself as a modern, tech-savvy industry leader.