Property market: the countries most at risk of a bubble
Mercato immobiliare i Paesi più a rischio bolla

Frankfurt and Toronto. Followed by Amsterdam, Hong Kong, Munich, Tel Aviv, Tokyo and Zurich. Here are the cities with the highest real estate bubble risk.

Industry analyses, which assess the real estate trends of 25 major cities worldwide, report that the growth of nominal residential property values in the analysed cities increased by almost 10 per cent on average from mid-2021 to mid-2022 – the highest annual growth rate since 2007. The exceptions to this trend are Hong Kong, Paris and Stockholm, whose property prices fell.

Real estate markets at the top of the 2022 index and at greatest bubble risk

As already mentioned, Frankfurt and Toronto portend price bubbles, but high risks are also highlighted for Amsterdam, Hong Kong, Munich, Tel Aviv, Tokyo and Zurich.

Canada: Toronto and Vancouver

In particular, in Canada, real estate price levels in Toronto and Vancouver have more than tripled in the last 25 years and, in the last two, the index has been sounding alarm bells, with a 35% spike due to the unsustainability of the pandemic. The recent rate hikes undertaken by the Bank of Canada will presumably be the cause of the housing bubble and the price revision is already underway.

Germany: Frankfurt and Munich

In Europe, the market with the greatest risk of a residential property bubble is the German market. Leading the way are Frankfurt and Munich, with indices rising to 2.21 and 1.80, respectively. Although current growth has cooled from double-digit levels in mid-2021 to around 5 per cent in mid-2022, both German cities have seen property prices more than double in nominal terms over the past 10 years. The combination of rising financing costs and little prospect of economic growth in 2023 is expected to dampen market exuberance somewhat, despite historically low vacancy rates.

Switzerland: Zurich and Geneva

Since the beginning of the pandemic, real estate prices in Zurich have risen by about 20 per cent. Here, the relationship between purchase prices and rents is out of balance and the market is in the bubble risk zone. The high purchase prices are likely to be subject to a stress test following interest rate hikes by the Swiss National Bank. But thanks to the continued strong population growth in the Zurich economic area, a price adjustment could occur over time without a strong term correction in nominal prices.

Even in Geneva, the market is overvalued and the price/rental ratio has reached high levels that are not synchronised with positive interest rates.

Italy: Milan

After a decade of stagnating prices, together with the post-pandemic economic recovery and lower interest rates, tax incentives for building renovation have supported price growth in Milan, which – with a risk index of only 0.34 – is far behind other bubble-price cities.

Indeed, due to the spread over the Bund, Italy has only marginally benefited from the ECB’s expansive monetary policies of the past decade. This is why property valuations have remained anchored to fundamentals. Indeed, prices in Milan, adjusted for inflation, have fallen by an average of 1.4% over the last ten years, while they have risen by over 6% in Frankfurt, Munich and Amsterdam.

France: Paris

Compared to other European marketplaces, Paris is an exception. Nominal real estate prices stagnated from mid-2021 to mid-2022 and, as a result, the French capital has moved out of bubble-risk territory. Despite this, the French capital remains the least affordable market in the Eurozone among those analysed in the study.

England: London

With an index above 1, London is moving into overvalued territory. Prices are 6% higher than a year ago due to a structural shortage of residential properties in the face of rising post-pandemic demand. Rents have soared as potential buyers are struggling to find suitable properties.

United States: Miami, Los Angeles, San Francisco and New York

Rising prices pushed Miami and Los Angeles into overvalued territories. In particular, the former continued to benefit from sustained immigration and the strong interest of foreign investors; in Los Angeles, on the other hand, imbalances increased further to the point that unaffordability reached almost unprecedented peaks.

Bleak outlook for San Francisco when considering hiring in the technology sector and the estimated continuation of hybrid and remote work patterns.

As for New York, the Big Apple city recorded the lowest price increase of all US cities analysed last year.

Middle East: Tel Aviv and Dubai

For the first time, Tel Aviv is in bubble territory. The market saw property prices triple from 2001 to 2017 and rents almost kept pace, partly due to a fundamental housing shortage. After a brief correction in 2018, Tel Aviv has returned to an explosive phase of price growth: between mid-2021 and mid-2022, in fact, values grew by 18%, reaching the highest since 2010.

Finally, Dubai. Last year, soaring oil prices and resurgent immigration revived the market. Residential property prices grew by 10 per cent between mid-2021 and mid-2022, and in the last four quarters, rents have even outpaced the growth of house prices. Therefore, the market remains fairly valued.

Asia: Tokyo and Hong Kong

In Tokyo, residential property prices have risen almost continuously for more than two decades, boosted by attractive financial conditions and population growth. Imbalances have reached the threshold of bubble risk as affordability has continued to deteriorate, but recently there have been signs of weakening, with price growth halving to 5% for the first time in a decade, less than the national average.

As for, Hong Kong, even though the market experienced a nominal price correction of about 4% between mid-2021 and mid-2022, the market has not yet left bubble territory.