UBS Bubble Research Suggests Caution Warranted for Prospective San Francisco Home-Buyers

October 5, 2016

UBS, a global financial advisory and wealth management firm based in Switzerland, for the past couple years has published, UBS Global Real Estate Bubble Index: For housing markets of select cities, primarily authored by Matthias Holzhey and Maciej Skoczek. The 2016 market research shows that many of the world’s major financial centers have overvalued housing. The research was conducted on for-sale homes in certain cities, however it’s often found that the trends spill-over into the rental markets and surrounding geographical areas. Authors emphasize that predictions can’t effectively be made about bubbles and busts, though the data suggests markets that exhibit signs of a bubble, where price corrections may be ahead depending on shifting factors.

“We can’t say if it’s a bubble or not,” explained Matthias Holzhey, head of Swiss real estate investment, UBS. “Bubbles seem to occur with regularity. We can’t predict when the correction will happen. We’re not in an equilibrium market, so it’s likely that prices will fall.”By “bubble,” the authors mean the significant mis-pricing of an asset, such as housing, over a long-term period. Though the reality of a bubble can’t truly be determined until it bursts, one tell-tale sign is a mismatch between prices and income.

“This type of report can be used as a barometer of the health of the Bay Area,” said Jeffrey Burke, senior vice president, investments, UBS. “Housing drives a lot of consumption. We’re just trying to identify those markets that are hotter than others. San Francisco is the most expensive U.S. market from our perspective.”

According to the report, due to causes such as market expectations, high investment from foreign capital sources and lax policy-making, some cities have experienced housing market price increases by 50 percent or more since 2011, despite this being out of sync with other local economic indicators. For 2016, the cities with the highest bubble risk are Vancouver, London, Stockholm, Sydney, Munich and Hong Kong. Overvalued cities include San Francisco, Amsterdam, Zurich, Paris, Geneva, Tokyo and Frankfurt. In terms of the most overvalued North American financial centers, Vancouver leads the pack, while data indicates that San Francisco is the most overvalued in the U.S.

“It is certainly possible that markets can stay overvalued for an extended period of time,” Burke stated. “While San Francisco is the most overvalued market in the country for 2016, it is not to the degree that it was in 2015. This was largely a function of how fast prices were rising in 2015 relative to incomes. Price growth in San Francisco in 2016 has slowed while median incomes have climbed somewhat. At present, we are cautious on San Francisco real estate and would recommend that individuals be prepared for limited capital appreciation in the immediate to longer term.”

The report attributes San Francisco’s increase in housing prices by more than 50 percent since 2011 to the huge growth of the tech sector combined with high foreign demand for the city’s real estate. By contrast, the average housing price increase across the nation since 2011 has been 15 percent. San Francisco’s current housing prices are 5-percent more than the 2006 overvalued peak.

“Supply is picking up in most cities besides London,” said Holzhey. “In Vancouver there’s a record number of housing permits being issued, and it’s the same in Hong Kong. Also, in San Francisco building permits are back to pre-crisis highs according to the numbers. This can trigger a price decline.”