Robert Broughton, Senior Client Advisor at UBS Jersey, shares key findings from the 2021 UBS Global Real Estate Bubble Index
Housing prices around the world have climbed in lockstep to new heights with urban markets sharing in the spoils.
This is noteworthy for two reasons. First, pandemic-related restrictions and the rise of remote working have actually weakened the case for urban housing. Indeed, rents in the cities analysed have declined on average – something that happened rarely in the past.
Second, housing affordability in cities was already heavily strained even before the pandemic struck.
A dangerous narrative
For most households, creditworthiness is the main barrier to entering the property market. Once that obstacle is cleared, the low user cost of owning property compared with renting, coupled with the expectation of ever-growing house prices, makes home ownership look attractive regardless of price levels and leverage.
This rationale may keep markets running for the time being. But it’s not sustainable in the long run.
Households have to borrow increasingly large amounts of money to keep up with the higher prices. As a result, the growth of outstanding mortgages has accelerated almost everywhere in the last quarters and debt-to-income ratios have risen – most markedly in Canada, Hong Kong and Australia.
Pressure is mounting on governments and central banks to take action. Lending standards, which were relaxed during the pandemic, are being tightened again.
Additional hurdles for professional housing investors and foreign buyers already loom on the horizon. Overall, housing markets have become even more dependent on very low interest rates, meaning a tightening of lending standards could bring price appreciation to an abrupt halt in most markets.
Outperformance questioned
Next to lower financing costs, urbanisation has been the main pillar of house price appreciation in city centres over the past decade. However, city life has suffered a considerable blow from lockdowns, as entertainment and shopping options were reduced and city-centre offices were largely abandoned.
The cost-benefit ratio of urban living has taken a sharp turn for the worse. Economic activity has instead spread outward from city centres to their (sometimes distant) suburbs and satellites – and so has housing demand along with it.
Consequently, for the first time since the early 1990s, housing prices in non-urban areas have increased faster than in cities since mid-2020.
While some of the effects may be transitory, this reversal weakens the case for quasi-guaranteed house price appreciation in city centres.
The impact of this development will likely be even bigger in places with stagnating or shrinking populations (like most of Europe), as supply will have an easier time keeping up with demand.
Overall, a long, lean spell for cities’ housing markets looks more and more probable, even if interest rates remain low.
For first-time home buyers, however, waiting for more affordable prices is rarely an option, given that housing cycles are long-lasting and the timing of bigger market corrections unpredictable – especially if home ownership is a non-negotiable life goal in itself.
In light of the shaky housing market fundamentals, caution with regard to leverage is warranted.
London trailing
Over the past five years, London has recorded the second weakest price growth of all the cities included in the study. But the beginning of the pandemic in 2020 marked the bottoming out of the local housing market. Between mid-2020 and mid-2021, real house prices in England’s capital increased by almost 4%.
The recent recovery of the housing market has been supported by a number of factors. First, financing conditions have become even more attractive.
Second, the temporary stamp duty holiday has fuelled sales activity, leading to historically high demand for the Help to Buy financing scheme.
Finally, although housing completions have recently increased, the market remains structurally undersupplied.
Despite these supportive drivers, London’s housing market has lagged the overall UK market. The rise of home and flexible office models sparked an increase in demand and faster price increases for homes with more space and greater affordability – for example, those outside the city centre.
Nevertheless, after several challenging years, London’s prime property prices have stabilised.
For now, global travel restrictions and ongoing economic and political uncertainties continue to serve as a headwind to a stronger price rebound.
But a relatively weak pound may attract global investors again. The stamp duty surcharge for non-UK buyers, which was introduced in April 2021, will likely slow demand but not discourage it completely.
Worsening affordability, unsustainable mortgage lending and a rising divergence between prices and rents have historically served as forerunners of housing crises.
As long as financing costs trend toward zero, property prices, incomes and rents can continue to decouple.
But ever higher prices and leverage imply ever higher risks, a spiralling path that will likely prove a dead end in the long term.
• To download the UBS Global Real Estate Bubble Index report click here
Further information
If you would like to discuss this report, or find out how we can support your financial goals, please contact:
Robert Broughton, Client Advisor UBS AG, Jersey Branch
1, IFC, St Helier, Jersey JE2 3BX
Tel: 01534 701107
Email: robert.broughton@ubs.com
UBS AG, Jersey Branch is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. UBS AG, Jersey Branch is a branch of UBS AG (a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051, Basel and Bahnhofstrasse 45, CH-8001 Zurich) with its principal place of business at 1 IFC, St Helier, Jersey JE2 3BX. Terms and Conditions are available upon request. © UBS 2021. All rights reserved. www.ubs.com/jersey
• This advertising feature was first published in the November 2021 - January 2022 Technology Edition of Businesslife magazine