With the crazy seller’s market we’re experiencing now, it’s common for people to ask whether we’re in a “bubble” which could burst at any time.
Well, last Wednesday UBS Group released its annual Real Estate Bubble Index, and while it listed three U.S. cities (San Francisco, Los Angeles and New York) as “overvalued,” none of the seven cities listed as “bubble risks” were in the U.S.
Those seven cities with the highest “bubble risk” included Toronto (#3) and Hong Kong (#4), but the rest were all in Europe — Munich (#1), Frankfurt (#2), Paris (#5), Amsterdam (#6), and Zurich (#7).
Boston squeaked into the “Fair Valued” category, and Chicago narrowly made it into the “Undervalued” category.
I was surprised at this analysis until I read the UBS report myself instead of just the coverage of it on a real estate news service to which I subscribe.
The answer as to why more American cities weren’t on the list turns out to be very simple — UBS Group only studies “25 major cities around the world,” and the U.S. cities I mentioned above are the only U.S. cities analyzed each year in the report! Twelve of the 25 cities studied for this report are in Europe, with the rest divided between North America, the Middle East and Asia/Australia. It should be noted that the UBS Group office which creates the report is based in Switzerland, so it’s rather Euro-centric.
Click here to view the full UBS Group Global Real Estate Bubble Index.
Despite the limited number of U.S. cities included in the UBS report, there are some useful observations about our market, such as this one:
“Overall, the drop of mortgage rates to historically low levels supports house prices in the U.S. But price changes in the analyzed cities trail the nationwide average. Inner-city demand growth has slowed down as citizens move out to the suburbs as a result of affordability issues and the impacts of COVID-19. Continued migration to lower-cost and more tax-, business-, and regulatory-friendly states has accelerated this trend.”
Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, added the following: “The rise of the home office calls into question the need to live close to city centers. Pressure on household incomes cause many people to move to more affordable suburban areas. Moreover, already debt-ridden or economically weaker cities will have to respond to this economic crisis with tax increases or public spending cuts, neither of which bode well for property prices. Taken together, these factors amplify some longer-term uncertainties surrounding urban housing demand.”
Doing my own statistical analysis on REcolorado, Denver’s MLS, I see the trend described above. While the number of active (i.e., not yet sold) listings and days on market are at nearly all-time lows in Jefferson County, they are near all-time highs in the Lodo/Downtown Denver market. This is not a good time to sell a condo in any city center (except small cities like Golden), but it is certainly a good time to sell a single-family home (or a condo) in Jefferson County, as I have reported in previous columns.
The last time Realtor Magazine even dealt with the question of a real estate bubble was in November 2018. The consensus of real estate economists is that our country is not in a real estate bubble, but it’s hard not to worry about it as one looks at the recently increased rate of appreciation in home prices.
With no end in sight to the low mortgage interest rates and with the rich getting richer under the Trump tax cuts, it’s understandable that the real estate market is performing as it is, but such appreciation cannot be sustained long-term.
Only time will tell, and our crystal balls will at least clear up a little after the current election season ends. A Biden victory is sure to bring rollbacks of the Trump tax cuts which benefited the rich (defined as those having taxable incomes over $400,000 per year) and the super rich, which will reduce some of the upward pressure on home prices, but those rollbacks are critical to address the widening wealth gap in America and the exploding national deficit — something that used to be an important issue among Republicans!