Global Real Estate Bubble Index: “Tel Aviv Out of Balance”


Apartment prices in Tel Aviv are unbalanced, and are valued far beyond their value, according to the UBS Global Real Estate Bubbles Index. The bank, which has created a “traffic light” that warns of bubble formation, marks Tel Aviv as a yellow city – a city that is not in a bubble. But that its real estate values ​​are higher than their true value.

The UBS Global Real Estate Bubble Index is an annual study produced by UBS Global Wealth Management’s Chief Investment Officer, examining apartment prices in 25 cities around the world, by a number of criteria, and classifying them into 4 categories in its bubble light: Cities are painted, which the Bank estimates are undervalued, cities are painted green, where their apartment prices reflect Schwein, and yellow, where apartments are overvalued, while cities are marked with a fear of a bubble.

The index is based on a combination of two main indices: the first – the ratio between apartment prices and average income (Price to income – PI) and the ratio between apartment prices and rental prices (Price to Rent – PR). The data is based on the second quarter of the year.

According to the index conducted in recent days, there is a risk of a bubble forming or a significant overestimation of the housing markets in half of the cities surveyed. The euro area stands out with 5 cities where there is a fear of a bubble: Munich and Frankfurt are the first, followed by Paris, Amsterdam and Zurich. Other notable red cities: Toronto and Hong Kong, which the bank’s experts write about as “showing great imbalance.”

Not unique to Israel

The rise in apartment prices is not unique to Israel. Bank experts write in the report that real price increases have accelerated in the last four quarters. In many of the most prominent cities in Europe, prices have soared by more than 5%, with Munich, Frankfurt and Warsaw leading the way. Rising prices in cities in Asia and the Americas, with the exception of Sydney, remained in the low-to-medium single-digit range. Madrid, San Francisco, Dubai and Hong Kong are the only ones where prices have fallen. This is the lowest number of cities that have shown a drop in prices since 2006.

On the other hand the city of Chicago still suffers from underestimation, and lies alone at this end of the scale.

Regarding Tel Aviv, says Caroline Kunhart, director of Central and Eastern Europe, Greece and Israel at UBS Global Wealth Management, that “over the past 30 years, Tel Aviv has experienced price growth that was among the highest among the cities participating in this study.”

“Despite the short-term uncertainty, favorable financing conditions and limited housing supply should keep house prices rising. Although this means that the ability to buy apartments is stretched to the limit, it is also a sign of Tel Aviv’s economic growth.”

About 4 years ago, Tel Aviv’s position in the index was worse and it was even included in the red cities category. Since then it has recorded a decline until 2019 and has since started rising again in the index. Apart from Tel Aviv, the index also includes Dubai in the list of Middle Eastern cities and it shows almost opposite behavior between the two cities: Dubai was painted red in 2008 and has since recorded a steep decline in the index. For the information of Israeli real estate investors – the city is currently considered a “green city” in terms of the risk of a bubble.

“Since the last peak in 2014, prices have fallen by more than 35% and the rating is close to low price levels. Positive effects on the price of high population growth and more favorable mortgage regulation are offset by the continued high growth in supply and low fuel prices,” it said. UBS people on Dubai.

Three reasons for the immunity of the housing markets

So far, the authors of the report note that despite the corona, housing markets have shown resilience in the first half of 2020. This is for 3 reasons: housing prices are a backward-looking economic indicator, and are able to reflect economic decline only after a certain delay; Second, most potential home buyers did not suffer a direct impact on their income in the first half of 2020. The credit options offered to companies and short-term employment plans alleviated the damage of the crisis; Third, governments have demonstrated support for homeowners in many cities during periods of closure. Subsidies on housing increased, taxes were lowered, and foreclosure lawsuits were suspended.

According to Mark Happel, chief investment officer at UBS Global Wealth Management: “At this point in time it is not known to what extent the rise in unemployment and the bleak outlook for household income will affect housing prices. But it is clear that the current acceleration will not be sustainable in the short term. “In a drop in most cities, which indicates a possible correction phase after the subsidies evaporate and the pressure on revenues increases.”

The high market estimates and the uncertain expectations in the short term put the long-term urban housing route under focus. On the one hand, the main drivers of the rise in urban housing prices – excellent employment opportunities, quality services, low financing costs and limited supply growth – are still valid. But on the other hand, the epidemic seems to have accelerated the change in the direction of population movement – from the cities to the wider metropolitan areas around them.

Claudio Safotelli, director of real estate at UBS Global Wealth Management’s chief investment officer, explained: “The rise of the home office calls into question the need to live close to city centers. The pressure on household incomes is causing many to move to cheaper suburban areas. Beyond that, cities that are already trapped in debt and economically weak will have to respond to this economic crisis by raising taxes and cutting public spending, two measures that do not bode well for property prices. “All of these factors together raise the likelihood of uncertain effects on urban housing in the longer term.”

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