The annual UBS Global Bubble Report revealed that once again New York real estate prices are fairly valued. UBS economists analyzed the data of 20 financial centers, of which New York, Boston, Milan and Chicago were determined not to be either fairly valued or under valued. The remaining 16 cities were either classified as either in bubble territory or over valued.
What does it mean to be fair valued? It means that the perceived value of an asset is equal to the market or actual value of the asset. In contrast, an asset bubble occurs when the price of the asset has exceeded its actual value. This can happen for a variety of reasons, such as speculation, demand and exuberance. A bubble usually starts with an increase in demand, in the face of limited supply. Speculators enter the market, further driving up demand and prices. At some point, however, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices. This is when the bubble bursts! You want to ensure you are out of the asset before this happens.
UBS noted that the highest bubble risk was attributed to Toronto, Hong Kong, London, Sydney, Vancouver, Munich and Stockholm. For three years in a row Hong Kong, London and Stockholm have been in bubble territory. We don’t see as changing, given the economics of each of these three housing markets. Other cities that were determined to be overvalued and approaching bubble territory were Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva. Accordingly, these 16 cities should not expect price appreciation and are at a high risk of a correction.
The London real estate market, like that of Vancouver, for instance, has decoupled from local household earnings with the influx of foreign buyers. However, this decoupling is unsustainable and the London and Vancouver property markets could see steep price drops like those projected for Hong Kong, where property prices have long decoupled from fundamentals. In contract, Manhattan real estate prices, which are and always have been high, have not decoupled from fundamentals. They are supported by high paying jobs.