Our Opinion: 2021

Global Property Bubble

Inflation-adjusted house prices grew by 6% in the year to mid-2021 across the 25 global cities analysed by the latest UBS Global Real Estate Bubble index.

Plummeting borrowing costs and the demand for extra space created by the shift towards working from home have helped drive the rally. Closed offices and entertainment venues are also denting the appeal of cities. For the first time since the 1990s, housing prices in non-urban areas have increased faster than in cities.

The 2008 financial crisis was caused by an overheated US housing market, but
today America looks in much healthier shape. While prices have soared over the past year, mortgage-delinquency rates are parked near historical lows. Low interest rates are keeping mortgages affordable.

Instead, UBS finds that Frankfurt, Toronto and Hong Kong are the cities most at risk of a bubble. The report compares prices to data on local incomes and rents and looks for signs of excessive lending and construction activity to determine the risk of a bubble. London is rated as “overvalued”, but is not in bubble territory.

Germany, where both Frankfurt and Munich make the top five in the bubble index, shows particular signs of overheating. It is historically a nation of renters, with a homeownership rate of 43%, compared to 65% in the UK. Pro-tenant laws and high transaction costs mean many see little point in buying. Yet rising prices are prompting people to bet on bricks and mortar: the average price per square metre in Berlin has risen from €1,750 to €5,150 in ten years. Young Germans sound British as they talk of getting on the “property ladder”.

London’s office market has turned a corner. Property agent Cushman & Wakefield reports that firms leased 2.77 million square feet of office space in the capital during the third quarter, a 54% jump on the amount rented during the previous three months. There has been especially strong demand from media and technology businesses. The data pours cold water on the idea that the pandemic heralded the end of the city-centre office.

Facebook is one of the bigger tenants to have signed a new London lease of late. After delaying new office decisions because of lockdowns, more businesses are taking the plunge. Uncertainty after the 2016 referendum slowed the building of new office blocks in London, so supply is tight. London-focused real estate investment trusts (REITS) are cashing in. In New York, however, a building glut means office developers face a tougher period ahead.

14th December 2021