Hong Kong Slips to Number Five on UBS List of Real Estate Bubbles

Hong Kong’s declining housing market may have a silver lining as the city has fallen to fifth place on a list of the world’s riskiest housing markets compiled by a Swiss bank, which measured residential prices in 25 leading cities globally.

UBS’s 2022 Global Real Estate Bubble Index cited a combination of a lack of affordability, economic woes, and onerous Covid restrictions as the main drivers of a drop in demand that saw nominal house prices fall 4 percent between mid-2021 and mid-2022 in the city.

That price slide pulled Hong Kong down by two places on UBS’s list, compared to 2021 and marks a sharp decline from 2018 when the European lender rated the city as the most over-inflated housing market in the world.

Despite this fall in prices, UBS said that imbalances in the city’s property market have declined only slightly and Hong Kong still faces an elevated risk of experiencing a property market crash.

Further Price Cuts ‘Likely’

“The market remains in bubble risk territory as household leverage rose and rents fell by more than prices. Looking ahead, higher mortgage rates and a weakened economic outlook will likely lead to further property deflation,” the report’s authors said.

UBS’s report did say that the medium term prospects for Hong Kong were more positive but this is dependent on an economic recovery occurring in the mainland market.

The report warned that the global property market is on the edge of ‘tipping point’, as central banks have switched into a rate tightening cycle.  “Imbalances in global metropolitan housing markets are highly elevated and prices are out of sync with rising interest rates,” the report said.

These risks saw Tokyo join the group of cities in the bubble risk zone for the first time since UBS started publishing its report in 2015, making it the second riskiest market in Asia and ninth on the global list.

An extended period of ultra low interest rates in Japan that predate the 2008 global financial crisis have helped spur a 20-year long continuous rise in Tokyo real estate prices. UBS said this has resulted in the Japanese capital decoupling from the rest of the country in terms of affordability.

Unlike Hong Kong, however, UBS’ research suggests that the long term outlook may be more positive for Tokyo. According to the firm, price growth halved to 5 percent in year-over-year terms and was below the national average for the first time in a decade.

Rent Hikes Steady Singapore

Average residential rent increases of 34 percent over the last 12 months, may be bad news for would-be tenants but UBS said the leasing hikes have reduced the chances of a property bubble emerging despite house prices rising 11 percent over the last year.

“The market remains in only slightly overvalued territory as high rental demand has prevented a larger increase in imbalances,” the report said.

Singapore retained its place at number 21 on UBS’s bubble list, sandwiched between New York and Milan.

UBS pointed to a number of cooling measures that the government has introduced in recent months, such as higher stamp duties on secondary and subsequent residential properties and tighter lending standards for private and public properties, which it said reduce the level of risk in the market.

“Also, the government has announced efforts to increase the supply of housing to meet strong demand,” the report added.

All three Asian cities on the list suffer from issues of affordability and UBS’s report warns that this is a global issue. Its research shows that rising interest rates and increasing house prices over the last months means a skilled service worker can afford roughly one-third less housing space than before the pandemic.

Tracking Bubble Indicators

UBS said that while it is not possible to prove the existence of a bubble until one bursts there are a number of key indicators it looks to when compiling its list of property markets on the cusp of overheating.

“Typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns,”