Bubble Risk: A City by City Breakdown

UBS Global recently released its 2017 Real Estate Bubble Index. The Index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio, change in construction-to-GDP ratio (economic distortion), and relative price-city-to-country indicator.

Some cities across the country show signs of an oncoming housing bubble, even though most home prices in U.S. cities remain below its 2008 peak in real terms. However, San Francisco, California, is an exception, where real prices have increased by almost 65 percent since 2011, according to the report. In addition, the report noted that “the city shows signs of overvaluation but no bubble risk, given its strong economic fundamentals amid the astonishing boom of tech companies.”

Los Angeles, California, is an overvalued metro as well, as, since 2012, prices have increased at twice the rate of the national average. Boston, Massachusetts, has grown at a rate of 15 percent in the last four years, in line with the national average, while New York and Chicago, Illinois, oriented toward the financial sector and the overall U.S. market, “has outpaced more traditional industries.” Overall, the report discovered that New York and Boston were fairly valued, while Chicago, Illinois, is undervalued.

Compared to the rest of the world, New York is one of the most expensive and unaffordable markets in the world, even though the report mentions that the metro is fairly valued. For an average, highly skilled worker, it would take 11 years to afford a 650 square-foot apartment. The report notes that this could be due to declining population growth and increased financial burden, which if continued, could limit financial affordability even more.

Click here to read the full report, along with comparisons to other international metros.