Global housing market imbalances have declined sharply over the past two years due to the global surge in inflation and interest rates, with only Zurich and Tokyo remaining in the bubble risk category.
According to the UBS Global Real Estate Bubble Index 2023, real house prices in the 25 cities analyzed fell by 5% on average.
The sharp drop in imbalances was driven by both declining house prices and inflation-driven income and rental growth. Mortgage lending growth has also halved since mid-2022, leading to a decline in household debt to income, especially in Europe.
On average, the amount of living space that is financially affordable for a skilled service worker is still 40% lower than before the pandemic began. More downside in prices is likely if interest rates remain at their current elevated levels.
Real home prices in Zurich continued to rise in 2023, albeit at a slower pace than in previous years, while rental growth has accelerated sharply and surpassed house price growth.
In Germany, the inflation-adjusted house price level in Frankfurt and Munich doubled between 2012 and 2022, the strongest growth of all cities in the study. However, rate hikes as well as high inflation triggered an ongoing revaluation of almost 20% in Frankfurt and 15% in Munich.
Real prices in London’s housing market have been on a downward path since Brexit and remain under pressure as local affordability is at its worst since 2007, due to high mortgage rates.
In Warsaw, real home prices increased by almost 40% between 2012 and 2022, but the strong and persistent inflation and the spike in mortgage rates have led inflation-adjusted prices to decline about 10% since mid-2022, moving demand to the rental sector.
Excessive housing valuations in Stockholm and a high reliance on variable-rate mortgages saw inflation-adjusted prices corrected by over 20% between mid-2022 and mid-2023, more than in any other city analyzed.
Real prices in Amsterdam have fallen by 14%, the strongest annual correction since the 1980s, with worsening financing conditions, diminishing household purchasing power, and regulatory changes all weighing on demand.
In Paris house prices have been declining since 2021, a process that has accelerated in recent quarters among diminishing affordability, lending restrictions, and a property tax hike.
Madrid’s housing market has remained affordable and, after a three-year period of stagnation, prices increased by 3% in inflation-adjusted terms over the last four quarters.
In Milan, real prices dropped by 2%, in line with local rental and income growth, but valuations should be maintained in nominal terms.
House prices in Geneva are less than 20% higher than ten years ago, stagnating between mid-2022 and mid-2023 due to the mixed economic outlook and significant out-migration to more affordable regions.
Despite this, UBS predicts that the seeds for the next property price boom have already been sowed in some cities. Hybrid working has not weakened demand for city living in a sustained manner and the housing shortage is likely to intensify as fewer building permits have been issued recently, especially in European urban centres.