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March 17, 2022

The highs and lows of global real estate

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Julius Probst
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Global real estate bubbles 

Frankfurt, Toronto and Hong Kong lead the cities with the most inflated housing markets. Our first chart this week brings together the UBS Global Real Estate Bubble Index with Oxford Economics’ macroeconomic indicators for selected metropolitan areas. Markets rated below -1.5 are depressed; those ranging between -1.5 to -0.5 are undervalued, -0.5 to 0.5 are fairly valued, 0.5 to 1.5 are overvalued and everything above are in a bubble.

The German-speaking parts of Europe, as well Canada’s two biggest cities, score high on the index while major US cities are still relatively undervalued despite large house price rises in recent years. 

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US housing 

In the wake of house price surges in 2021, rental prices of apartments have also risen. Prices have increased an average 17% since 2020 though the growth is uneven across the country. The chart below shows the states that have seen the fastest and slowest growth over the past two years. 

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Sellers’ market 

The existing stock of real estate has been steadily decreasing in recent years, putting further upward pressure on house prices. The percentage of sales of homes that have been on the market for less than a month surged to about 90% last year and is still comfortably higher than at any point in time before the pandemic.

The University of Michigan Consumer Survey also shows that the US is currently a seller’s market. 

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Construction starts  

One thing that may finally slow the runaway housing prices is that construction starts – which fell to a record after the 2008 recession and remained depressed for nearly a decade – have resumed. 

However, using our Macrobond ratios to calculate the series in per capita terms, we can see that on a population-adjusted basis, construction remains relatively low on a historical basis. 

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China property prices 

Over to China now, where we can see a correlation between a city’s GDP and property prices. As this next chart shows, the largest cities – both in economic output and population – tend to have the highest residential real estate prices. 

China’s real estate sector is still struggling amid a liquidity crisis that first engulfed the property developer Evergrande. 

Yields on Chinese high-yield bonds are soaring while the spread between China and the rest of Asia is also approaching record highs. Both credit and equity risks have also surged. The rise in high yields and credit risk can be traced back to the deflating housing bubble, as Chinese real estate developers account for a significant part of Chinese high-yield bonds.

Residential real estate prices in the secondary market are now falling, while the number of Chinese cities reporting positive growth has fallen to around 30%.  

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Hong Kong real estate prices and mobility 

The new Covid-19 restrictions in Hong Kong and mainland China are set to have a significant negative impact on the Chinese economy and its real estate market. The following chart shows a correlation between office property in Hong Kong and the movement of people. Commercial real estate prices that started recovering after the last lockdown will likely fall again as infections surge. 

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Global workplace mobility 

Hong Kong’s worst outbreak of Covid-19 has made it the most ‘immobile’ city when compared to the pre-pandemic era, as our last chart shows. Employees in most European cities are also slow to return to the workplace while those in the Middle East are keenest. 

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