What do Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong all have in common?
According to economists at UBS Wealth Management, these six cities all have the notorious designation of being the real estate markets furthest into “bubble” territory:
The major Swiss bank recently published the results of their 2016 Real Estate Bubble Index. The report found that since 2011, the six cities in “bubble” territory have seen housing prices soar at least 50% on average. Meanwhile, in other comparable markets, the average increase in prices was less than 15% over the same timeframe.
At the top of the list, not surprisingly, sits Vancouver – a city that has been grappling with real estate mania for some time.
Here’s Vancouver’s rise, compared with other select markets in North America.
Note that San Francisco is in the “overvalued” zone, but getting close to an official bubble designation.
A DELICATE BALANCE
Why are these housing markets so overvalued?
It comes down to three main drivers, according to UBS: a flood of foreign capital, loose monetary policy, and bullish expectations from buyers.
Flood of foreign capital: Wealthy Chinese people are leaving the country in droves, and they are looking at places to park their capital. Cities like Vancouver and Sydney make sense because of their proximity. Cities such as London or New York, on the other hand, may appeal because they are global financial centers.
Loose monetary policy: Low interest rates, some which are zero or even negative, work to artificially inflate asset prices. Lenders can get mortgages for rock-bottom rates, and systematically bid up the price of real estate. We are currently undergoing one of the biggest financial experiments of all time, as central banks have run out of levers to pull. Rates are near zero and there has already been unprecedented amounts of liquidity pumped into the system through quantitative easing.
Bullish expectations: At the end of the day, people will continue to bid up real estate bubbles if they think they will profit from it. This is human nature, and it will take a shift in overall market sentiment to hinder this.
From our perspective, the most interesting and concerning aspect is the loose monetary policy found worldwide. If central banks raise rates right now, markets will crash.
If they continue to postpone due to weak economic data, the housing bubbles will continue to inflate. The more they inflate, the more sensitive they are to any trigger that could pop them.