Housing Bubble Risk

New York, San Francisco, and Los Angeles are the most overvalued property markets in the U.S., with the greatest risk of a housing bubble, according to financial services firm UBS Group’s Global Real Estate Bubble Index 2018, which focuses on 20 major cities.

UBS defines a property bubble as the “substantial and sustained mispricing of an asset,” but the bubble can’t be proven until it bursts, at which point it’s already too late.

The Index uses historical data to track the patterns leading up to a burst. Those patterns include home prices unyoked with local incomes and rents, and an overall economic imbalance, where lending and construction activity exceed what the markets require to be considered healthy.

The latest reading from the UBS Index finds that while none of these markets is currently in the “bubble risk” category, an imbalance of supply and demand, along with added regulation on buy-to-rent and foreign real estate investors, is curbing the markets’ affordability to the point of possibly triggering a price correction.

San Francisco was deemed the most overvalued U.S. market, as real home prices there have grown 80 percent over the past five years, surpassing the city’s 2006 value peak by more than 20 percent. The report concludes that the city is on track for “high valuation risk.”

Meanwhile, in international markets, Hong Kong, Munich, Toronto, Vancouver, and Amsterdam are currently at greatest risk of a housing bubble, according to UBS.

On the other hand, Boston is considered fair-valued in the study, while Chicago is the only undervalued city of the 20 markets listed. Both are considered to have limited risk, as the supply of affordable housing checks the chances of a price correction.