The global cities most at risk of a property bubble

While seven cities are considered in ‘bubble risk’ territory a further 12 are currently overvalued

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Munich is the most overvalued property market this year as real estate price imbalances soared across the eurozone, a new study from Swiss bank UBS found.

The bank’s Global Real Estate Bubble Index 2019 found a significant overvaluation in half of the 24 housing markets analysed by the research.

The bubble risk appears greatest in seven global cities, with Munich the most vulnerable, followed by Toronto, Hong Kong, Amsterdam, Frankfurt, Vancouver and Paris.

Major imbalances are also found in locations such as London, San Francisco, Tokyo and Stockholm, while valuations are considered stretched in Los Angeles, Sydney and Geneva.

"On a global level, economic uncertainty is outweighing the effect of falling interest rates on urban housing demand,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “However, in parts of the eurozone, low rates have still helped to push real estate valuations into bubble risk territory."

Buying residential property in global cities is often considered the right path towards wealth accumulation by investors. However, over the last four quarters imbalances have soared, particularly in the eurozone, the report found.

Frankfurt and Paris are the two most prominent new additions to the bubble-risk zone when compared with last year. According to the UBS study, a bubble refers to "a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts".

Meanwhile, London's property market has cooled considerably due to the ongoing Brexit saga, moving the financial hub out of bubble-risk territory for the first time in four years.

In the US, index scores have not risen in any cities included in the study for the first time since 2011. Regulatory changes and affordability issues, for example, have caused home prices in New York to lag the countrywide average. Similarly, affordability issues, trade tensions and diminishing foreign demand have capped price growth in San Francisco and Los Angeles for the moment.

The momentum in Hong Kong's red-hot property market has also stalled as a weaker economic outlook cooled residential buyer sentiment. However, the market remains firmly in bubble risk territory.

In Australia, prices in Sydney were 15 per cent lower by the end of the first quarter of this year than at the peak, and credit growth for housing had reached an all-time low. Singapore's brief housing boom between mid-2017 and mid-2018 is also over thanks to regulatory measures capping price growth expectations and keeping the market in fair-valued territory.

Meanwhile, Dubai's housing market, which was included for the first time, is fairly priced, the report found.

"After peaks in Dubai's housing market in 2008 and 2014, prices have fallen by almost 35 per cent," Ali Janoudi, head Central and Eastern Europe, the Middle East and Africa at UBS Global Wealth Management, said.

"We expect prices to find a bottom soon but we would still encourage all investors to be diligent in their real estate research," he added.