Economy Watch: Residential Bubbles on the Horizon?

A UBS report says yes, although U.S. metros are less at risk than major cities abroad.
Courtesy Flickr Creative Commons user Wonderlane

Courtesy Flickr Creative Commons user Wonderlane

A decade ago, the U.S. housing market was about as bubbly as it was going to get. The consequences of that price inflation, of course, were dire for not only residential real estate but commercial properties and the economy at large. Arguably, some sectors of the economy have yet to recover completely.

Are residential bubbles coming back? In some places, the answer is yes, UBS concludes in its Global Real Estate Bubble Index, which tracks the risk of housing bubbles in global financial centers. Those are the kinds of places, it’s worth noting, where financial panics tend to originate and create a lot of harm.

Vancouver tops the index in 2016, according to UBS. Bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong, and to a lesser extent, U.S. cities such as San Francisco, Boston and New York. House prices within the bubble risk zone have increased by almost 50 percent on average since 2011. In the other financial centers, prices have risen by less than 15 percent.

The bubbles have emerged, as bubbles do, from a mix of optimistic expectations, capital inflows from abroad and loose monetary policy, UBS noted. The in question markets are vulnerable: a change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices. Investors in overvalued markets shouldn’t expect real price appreciation in the medium to long run, the report warns.