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Ft Lauderdale Real Estate News 10/9/19

Cities With Highest Risk of Real Estate & Housing Market Bubble

The latest report from Swiss Bank UBS identifies seven North American cities which could face a real estate bubble in the near future. Designed to ascertain potential risk of property price bubbles in cities around the world, The UBS Global Real Estate Bubble Index attempts to determine long-term perspective of the housing market. This year's report discusses cost of living around the world, where service sector professionals need to work the longest to buy an apartment, and housing markets of cities on the list.

Though a regularly recurring phenomenon in property markets, the term "bubble" refers to a sustained and substantial mispricing of an asset, which usually cannot be proven until it bursts. Tracking the basis of such patterns, The UBS Global Real Estate Bubble Index tries to gauge the risk of a property bubble.

Comparing the relation between incomes, construction levels and mortgages changes to rents, UBS concludes real estate markets in certain cities are over-valued, might therefore face a risk to crash, while other cities have fairly valued housing markets.

In the report's intro, Matthias Holzhey and Claudio Saputelli claim one major risk in real estate values in certain urban centers is "low affordability." "Growth prospects of a city in question drop if employees cannot afford an apartment with reasonable access to the local job market."

These are the North American cities UBS deemed most at risk of a housing crash:

Toronto, Canada

2019 bubble index score: .86

The fourth largest city in North America, Toronto has seen a rapid rise in cost of living over the past decade. According to UBS, rent prices tripled from 2000 and 2017, however affordability problems and a low level of new construction have caused many to delay buying homes while housing prices have been spiking.

In coming years, this might create a scenario where listings linger on the market for months as demand and incomes cannot keep pace with the high home prices.

The report claims: "As in Vancouver, local authorities introduced a foreign-buyers' tax, rent controls and tighter mortgage standards to tackle worsening affordability. Eventually, the housing frenzy abated and inflation-adjusted prices have stagnated over the last four quarters."

Vancouver, Canada

2019 bubble index score: 1.61

Long heralded for its picturesque natural beauty, oceans and heavily wooded mountains, this city in western Canada has witnessed skyrocketing real estate values over the last 10 years, much like Seattle and San Francisco. Housing demand, however, is not keeping past with prices and Vancouver's market has begun to stagnate, even though the municipal government has introduced a foreign buyer tax and vacancy fees in an attempt to mitigate affordability issues.

"A turnaround is unlikely for now due to increasing regional housing supply, especially as real prices remain 75% higher than a decade ago," the report reads. "However, downside risks are mitigated by still attractive financing conditions, as the Bank of Canada has lowered the qualifying mortgage rate for the first time since 2016."

San Francisco, California

2019 bubble index score: 1.15

The American city with the highest risk of a real estate crash in coming months, San Francisco's high housing values have become legendary as big tech and Silicon Valley have made this scenic city in Northern California its hub. Home prices have risen so quickly an average worker must now spend 116.8% if their annual income to afford a home in the region.

Some analysts claim the market is starting to slowly stabilize, that this era of incredibly rapid growth is finally coming to an end. According to The UBS Global Real Estate Bubble Index, exacerbated by historic low affordability for the working middle class and diminishing foreign demand has created weakness in the Bay Area's housing market. The supply shortage may start to ease with the highest number of housing permits since the late 80s, potentially accelerate a price correction."

Los Angeles, California

2019 bubble index score: 0.99

Still struggling to curb increasing unaffordability, Los Angeles, the largest city in California, may not see increases as drastic as San Francisco, but UBS does not predict a sharp price decline any time soon, with high demand for housing offset somewhat by rising real estate prices.

"Affordability has worsened as real prices have surged more than 50% since 2012, surpassing real income growth despite a booming local economy," reads the report. "Given the area's exposure to international trade we expect demand to weaken in 2020."

New York City, New York

2019 bubble index score: 0.50

While sky-high rents continue to plague Manhattan, New York City has seen a shift recently, with home prices not growing as fast as in other parts of the country.

Still overvalued compared to other municipalities, New York has seen many hold off buying due to high taxes and new real estate regulations, curbing the kind of growth necessary for continuing market expansion.

"With income growth surpassing inflation, rents have increased by almost 60 percent in inflation-adjusted terms since then," the report reads. "But a price rebound seems unlikely in the short term despite improved affordability as the financial center in Manhattan lacks economic stimulus."

Boston, Massachusetts

2019 bubble index score: 0.36

Though in a healthy state compared to other cities on the list, Boston could still see a real estate bubble in the near future due to growing income to price discrepancies which may not be offset necessarily by slowing price growth.

According the to report: "Growth rates have abated recently, though prices have increased continuously since 2012. Values have risen 3% in inflation-adjusted terms over the past four quarters, in line with the national average. A catch-up in price levels and the economic appeal of Boston have triggered a relatively strong rise in prices."

Chicago, Illinois

2019 bubble index score: -0.77

Even though some growth has been shown, Chicago was the one undervalued city to make the list. Real estate prices are more than 25% lower than 2006. According to UBS, the city is affordable but not growing on the economic and jobs front. As a result, the Chicago market is currently at high risk of experiencing major stagnation.

"Overall, rental and income growth might keep pace with home price increases," reads the report. "The city's declining population, sluggish employment growth and high indebtedness will likely continue to hinder significant price increases."