Hong Kong property

Hong Kong, world’s most overvalued housing market, is at greatest risk of bubble, says UBS

City’s residential prices have risen by more than 10 per cent over the past four quarters and UBS predicts these booming prices will slow in near future

PUBLISHED : Friday, 28 September, 2018, 8:03am
UPDATED : Friday, 28 September, 2018, 10:15pm

Hong Kong remains the world’s most overvalued housing market and is at the greatest risk of a property bubble, according to UBS Global Wealth Management on Thursday.

Besides Hong Kong, property values over the past year also soared in Munich, Toronto, Vancouver, London and Amsterdam, according to UBS’s Global Real Estate Bubble Index 2018.

Toronto and London remained at risk of a property bubble, even as their real estate prices have softened in the last year, the report said.

The study found price overvaluation in most major financial centres, with Chicago standing alone as the only undervalued city among the 20 ranked in the survey.

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Unlike the period leading up to the 2008 global financial crisis, there is little evidence of excesses in lending and construction, while mortgage volumes are growing at only half the rate.

“Although many financial centres remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto and London.”

UBS said cities that rated as being in bubble risk territory where at “an elevated risk of a large price correction”.

Price bubbles are also notoriously hard to identify, as “a non-ambiguous identification is only possible after the bubble bursts,” the bank said.

In Hong Kong residential prices have risen by more than 10 per cent over the past four quarters, in inflation-adjusted terms. Affordability in Hong Kong has deteriorated more than in any other major city during the past decade, as demand remains high in an undersupplied market.

UBS predicted the city’s booming prices to slow in the near future, but said a sharp price correction is unlikely.

Elsewhere in Asia, Singapore was one of the few cities where affordability has improved over the past decade. After six years of correction prices rose 9 per cent over the last four quarters, but the Lion City is still considered as a “fair valued territory”.

Boston and Milan were also noted as fairly valued, while Stockholm remained at risk even as prices have slipped 7 per cent since the middle of last year. Sydney was another market at risk, even as its prices have “slid moderately as tighter lending conditions diminished overall affordability”, the report said.

“The median total return on housing in the most important developed market financial centres was 10 per cent annually over the past five years, accounting for an imputed rental income and book profits from rising prices,” said Claudio Saputelli, head of real estate at UBS Global Wealth Management’s Chief Investment Office. “How appealing returns will be in the next few years is questionable. We recommend caution when buying residential real estate in most of the biggest developed market cities.”

During the past year, housing price growth has moderated in key cities, with a broad measure showing gains of 3.5 per cent on average, considerably less than in previous years. UBS noted, however, that prices were still gaining at a pace above the 10-year average.

An “explosive trend” continued in Hong Kong and Vancouver, as well as the main Euro zone economic centres.

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All Euro zone cities apart from Milan recorded a higher index score over the last four quarters, led by income growth, excessively low borrowing rates and bullish expectations, said UBS.

Meanwhile prices in London fell by more than 5 per cent in real terms.

In the US, San Francisco, Los Angeles and New York were rated as “overvalued”.

San Francisco saw prices rise 9 per cent in comparison to last summer, and are now up 20 per cent from their previous peak in 2006.

UBS cautioned that Hong Kong would likely enter into an era where prices swings are the new normal.

“Price volatility also has to be taken into account: in such a speculative market environment macroeconomic uncertainty, e.g. on Sino-US trade or on the yuan can weigh on sentiment at any time. Moreover, further regulatory tightening is a threat to the overheated market.”

UBS said cities experiencing strong overvaluation in real estate should not be expected to continue appreciating in the long term.