Just a few years after the last major wave of global correction, housing bubbles are inflating again in major cities across the world, with Vancouver and London facing the greatest risk of housing bubble, UBS in its 2016 Global Real Estate Bubble Index report said.
According to the index, which tracks 18 global financial centers, measuring overall housing prices and affordability, Stockholm, Sydney, Munich, and Hong Kong are also at risk of seeing its bubble burst.
In the past five years, house prices of the cities within the bubble risk zone have increased by almost 50% on average since 2011. In the other financial centers, prices have only risen by less than 15%.
Claudio Saputelli, head of global real estate in UBS Wealth Management's chief investment office, said: " This gap is out of proportion to differences in local economic conditions and inflation rates. What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy. When combined with rigid supply and sustained demand from China, this has produced an "ideal" setting for excesses in house prices."
UBS said that the three main drivers for the rise in prices were a flood of foreign capital, loose monetary policy, and bullish expectations,.
Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo and Frankfurt, the report said. In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago's housing market remains undervalued relative to its own history.
Matthias Holzhey, real estate economist in UBS Wealth Management's chief investment office, said: "The situation is fragile for the most overvalued housing markets. A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time."
Last year, just London and Hong Kong were deemed to be at risk of a being in a bubble.