An annual study of housing markets worldwide by investment bank UBS has identified Hong Kong as one of the world’s riskiest places to buy a home, while sizing up Singapore as a market ready for an upswing.
In its 2017 edition, the UBS Global Real Estate Bubble Index, which compares housing costs to a range of economic indicators to identify markets in danger of a correction, has picked out Hong Kong as the seventh riskiest market in which to buy a home.
The annual survey by the Swiss bank ranks Toronto –- where real housing prices have risen an average of 50 percent over the past five years – as the most over-inflated market globally. Filling out the top five riskiest markets worldwide, by the bank’s count, are Stockholm, Munich, Vancouver and Sydney.
The survey, which compares housing prices to person income, home rental rates and other economic indicators, breaks down cities into “bubble risk,” “overvalued,” “fair-valued,” and “undervalued.”
Hong Kong as Asia’s Most Overvalued City
Hong Kong, which ranked just below London on the bank’s ranking for bubble risk was identified as the city in Asia most likely to face a correction in housing prices at an unidentified point in the future. (The survey did not include mainland China locations).
The survey noted that even people who earn twice the city’s average income would struggle to buy a 60 square metre (650 square foot) apartment in the Asian economic hub, while prices for small homes have increased by more than 20 percent in the last four quarters. Despite home prices having reached new records this year, including Henderson selling a home in Central for HK$105,000 per square foot last month, Hong Kong actually improved its ranking this year globally, after ranking sixth worldwide last year.
Although the bank’s study found that Hong Kong housing prices are now nearly three times higher than in 2003 in real terms, UBS also acknowledged that, “Unabated investor demand and firmly entrenched optimistic expectations limit downside in the short term, despite the city featuring the worst housing affordability of all financial centers.”
Singapore Said Ready for an Upswing
In contrast to its competitor to the north, the UBS study categorised Singapore housing prices as falling into “fair-value” territory. Government figures released by the southeast Asian financial capital this week indicated that average home prices climbed 0.5 percent in the third quarter of this year, after four years of decline.
The study noted that, in real terms, home prices in Singapore are now 18 percent lower than in 2011, when they reached their previous peak. However, with the government now taking a more lenient regulatory approach and supply declining, UBS predicts brighter days ahead for the Singapore market.
“A housing market turnaround seems to be in the cards and we foresee price growth at a low single digit rate next year,” the study noted. While the average price to average income level in the city remains high at 11 to 1, this represents a steep improvement in affordability from ten years ago, when the ratio was around 15 to 1. However, the study still classifies the Singapore housing market, along with London, Paris, New York and Tokyo, as having “decoupled” from local incomes.
Bubble Cities at 50-60 Percent Risk of a Crash
While UBS is careful not to predict eminent doom for any of the markets covered in its study, the research report stresses the importance of fundamental metrics in predicting future market performance.
“Nine out of 10 real estate crashes of at least minus 15 percent were preceded by a distinct overvaluation signal based on the UBS Global Real Estate Bubble Index methodology,” the study’s authors noted. Based on the history of previous market corrections between 1980 and 2010 UBS’ research estimates the likelihood of market suffering a crash after falling into “bubble-risk” territory as 50 to 60 percent over the subsequent 12 quarters.