With the UBS Global Real Estate Bubble Index we keep you up-to-date on the latest developments across global urban housing markets. But as real estate markets rarely trend sideways, this is not the most likely outcome. In cities with strong population growth, such an adjustment could manifest in the form of a prolonged stagnation in nominal purchase prices and a price correction in real terms-i.e., adjusted for inflation. Consequently, the willingness to pay for owner-occupied homes is likely to take a hit. At the same time, several shocks have rocked financial markets worldwide.
Interest rates-and in turn, financing costs-have climbed in recent months to combat elevated inflation. As a result, the imbalances have become increasingly severe.īut the picture is quickly changing. Even the most buoyant expectations have been exceeded in some cases in recent times. Ultra-low financing conditions and demand outpacing construction have led to increasingly optimistic price expectations among buyers. Indeed, the property market has long been supported by one major buttress in particular: central banks. The main reason for the exorbitant increases in home prices thus lies elsewhere. However, if urban residential rents are used as a benchmark, the supposed scarcity effect evaporates: rents have only risen hand in hand with local wages over the same period. The strong real estate boom of the last decade underlines this credo once again. Thanks to urbanization, this means property prices should rise significantly in the long run-more or less summing up the common narrative on the value growth of urban homes. And by its very nature, supply cannot be expanded at will in the short term.
This is definitely a metric worth watching very closely over the next year.In many cities, there is not enough housing supply. “That's what happened in early 2006 before the Great Recession hit and the market started falling in 2007. But if the late 2000s are any guide, quarterly foreclosure caseloads that spike by more than 10% per quarter would be a serious warning bell of danger for the U.S. “(I)t's hard to pinpoint a benchmark for (foreclosure) increases that would cause alarm. Only purchase a home if you plan to own it for at least a few years – and will be able to make the mortgage payments for the duration. For the typical homebuyer, now is not the time to buy real estate with the expectation of seeing value double in a short period of time. “Even when they can't, most can still sell, pay off their outstanding debt and come out with at least a small profit if they bought more than a year ago.” “Having equity in a home provides a lot of motivation for owners to get caught up on their loans and preserve what they've built up,” Barber says. High equity now serves as a cushion for the housing market in case of economic downturn. If homeowner equity sees a massive drop, either home values are dropping fast or there’s an influx of buyers who are putting little money down. If buyer demand completely disappears, it would be a sign of a problem. Housing markets have cooled slightly, but demand hasn’t disappeared, and in many places remains strong largely due to the shortage of homes on the market. That can prolong the housing shortage and draw out the demand-supply imbalance. With the slowdown in buyer activity, homebuilders are pulling back and there are fewer permits for new housing construction. Builders have been plagued with labor shortages for a decade, and the availability and cost of materials have been an ongoing issue since the start of the pandemic. If the gap continues to grow, it signals an increase. That surely would raise the number of households who fall behind on home loans and send foreclosure numbers upward,” Barber says. In the above chart, housing prices since 2021 have deviated from the fundamentals of price-to-rent ratio. “There are predictions of an upcoming recession and possible large-scale layoffs. If too many people are without work, then distressed home sales climb and foreclosures become more likely. A slight increase in unemployment would be OK, but a bottom fallout could be an indication of danger for the housing market.
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