Global Housing Bubble Watch: Why London, Hong Kong Are Dangerously Overvalued

Are we facing another global real estate bubble? Look no further than some of the most important financial hubs in the world.

The risk of a real estate bubble in top global cities has increased sharply, according to a new report on the Global Real Estate Bubble Index by UBS . Authors Claudio Saputelli and Matthias Holzhey argue that the housing prices in cities like Hong Kong and London are “fundamentally unjustified,” as benchmark metrics like price-to-income and price-to-rent ratios have reached all-time highs. Housing prices are now driven more by local and global investment demand, rather than local household earnings, according to the report.

The UBS Global Real Estate Bubble Index tracks the risk of a property bubble through five different metrics on the current valuation and historical pattern of housing markets, such as price-to-income and price-to-rent.  For instance, in Hong Kong, workers who make twice the average income would have a hard time buying a 60-square-meter apartment in the city center -- a strong signal that the skyrocketing housing prices in the city are now largely dependent on investment demand. If such demand retreats, the risk of housing bubble burst would increase significantly.

While the report observes an overall real estate bubble potential in the global market, different regions and cities have shown various levels of valuation risks. For instance, San Francisco has risen to the overvalued territory, as fast growth of the tech industry is driving up prices faster than the level of incomes. Interestingly, U.S. financial hubs including New York and Boston are fairly valued, while Chicago is actually undervalued compared to historical patterns. In comparison, cities in Asia Pacific are now mostly overvalued to various degrees; for example, Hong Kong has been in bubble risk territory since 2011.

Among the world’s financial hubs, London has the highest score of bubble risk as investors from Asia looked to the European financial center in the face of high property valuations in their regions. The report shares some alarming numbers: it takes about 30 years of rent cost to buy an apartment, and a skilled service worker would need to work about 14 years to buy a 60-square-meter apartment.  Moreover, the disparity between London and the rest of UK has continued to widen. London housing prices are now 6% above 2007, while the average nationwide prices have dropped by 18%. Consider too that over the same period of time, real average income dropped by 7% both in London and UK – another indication of the decoupling between incomes and housing prices.