Economy Watch: Certain Residential Markets Overvalued

In San Francisco, real residential prices have soared 65 percent since 2012, and remain 6 percent above the national average, according to the latest UBS 2017 Global Real Estate Bubble Index.
Source: UBS Global Real Estate Bubble Index

Source: UBS Global Real Estate Bubble Index

San Francisco is the most overvalued U.S. urban residential market, followed by Los Angeles, according to the recently released UBS 2017 Global Real Estate Bubble Index. Boston and New York are of fair value, while Chicago is the only undervalued major city in the study globally.

The company stresses that it isn’t predicting a market correction in any of these markets, merely that some markets are more ripe for that kind of price movement than others, based on various factors. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts, UBS noted.

Yet recurring patterns of property market excesses are observable in the historical data. Typical signs include a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity.

Priciest cities

In San Francisco, in the wake of the tech boom and buoyant foreign demand, real residential prices have soared 65 percent since 2012, the report said. Price growth has slowed in recent quarters, but remains 6 percent above the national average. Despite the thriving economy, average incomes have risen only 10 percent since 2012, and have thus not kept pace with house prices, worsening housing affordability further.

Since 2012, real residential prices in Los Angeles have increased by 45 percent, while the figure is just 23 percent across the U.S. The market’s prospering economy and demand from China are fueling the boom. In the New York metro area, real prices rose by less than 3 percent in the past four quarters and are 10 percent higher than in 2013, when the market bottomed out. The pace of price growth is only half the national average.

In Chicago, by contrast, prices have risen by 15 percent in real terms since 2012, but remain 30 percent below their 2006 peak. Decreasing population, sluggish employment and lackluster economic and income growth hinder the recovery of broad-based demand in the residential market.