Home values in leading markets continue to grow, despite the economic downturn caused by the coronavirus pandemic. Housing prices in many major cities are overheating, which increases the risk of a real estate bubble.
According to data presented by StockApps, Munich and Frankfurt top the list of cities with the biggest risk of the housing bubble in 2020. With a real estate bubble index score of 2.35, Munich represents the city with the highest housing bubble risk worldwide.
A real estate bubble or a housing bubble is a run-up in housing prices fuelled by demand, speculation, and an increase in spending to the point of collapse. It typically starts with an increase in demand in a time of limited supply. Speculators pour money into the market, further driving up demand. At some point, demand stagnates or decreases while supply continues growing, resulting in sharp price drops.
The UBS’ Global Real Estate Bubble Index 2020 showed more than half of 25 major cities analyzed were either at risk of a real estate bubble or overvalued. With a real estate bubble index score of 2.26, Frankfurt ranked as the city with the second-largest risk of the housing bubble globally. Toronto, Hong Kong, Paris, and Amsterdam followed, with 1.96, 1.79, 1.68, and 1.52 index scores, respectively.
London, Tokyo, Los Angeles, Stockholm, Sidney, Moscow, and New York are considered overvalued but not at risk of a bubble.
Statistics show Boston, Singapore, Madrid, Milan, and Dubai have fairly valued housing markets, while the Chicago housing market was the only one undervalued in 2020.
Analyzed by regions, Europe has the most considerable risk of the real estate bubble this year, along with Hong Kong. On the other hand, Toronto is the only major North American city that was at risk of a housing bubble.
Home values in major markets have been supported throughout the pandemic by government stimulus, low-interest rates, and mortgage bailouts, making recent price gains unsustainable.
With so many housing markets being overvalued or at risk of the real-estate bubble, especially in Europe, the economic uncertainty caused by the coronavirus outbreak only widen the gap between real estate prices and earnings.
The house price to income ratio is a basic affordability measure to see if earnings are keeping up. Lower rates are likely to support home prices since incomes can more easily carry them.
The 2020 OECD Analytical House Price Database showed Luxembourg led the ranking in the second quarter of 2020, with house prices to income indices rising over 138 points. Portugal ranked second with almost 130 points.
Netherlands, Spain, the Czech Republic, and Germany followed with 128.5, 126.6, 122.9, and 121.8 points, respectively. Denmark, Estonia, Finland, and Latvia were on the other side of the list, with less than 100 index points in the second quarter of 2020.