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The World’s Biggest Real-Estate Bubbles, From Hong Kong to Toronto

Chicago may be freezing cold for parts of the year, but it has one big advantage over global cities such as New York, London and Hong Kong: it’s affordable.

The Windy City is the only undervalued housing market in a survey of 20 financial centers by UBS Group AG, partly due to its widely publicized fiscal problems and rents rising faster than home prices. New York moved from affordable to overpriced in this year’s rating even as inflation-adjusted real estate prices fell 2 percent in the past four quarters, according to the bank’s Global Real Estate Bubble Index.

Chicago is “a wonderful city, but its fiscal challenges are well-known,” Jonathan Woloshin, head of Americas real estate at UBS’s global wealth unit, said Thursday in a phone interview. “When you factor in population flows, when you factor in income growth, when you factor in home price growth, that’s why Chicago scores where it does.’’

Boston, Milan and Singapore were deemed fairly valued, while 10 cities including San Francisco, Tokyo and Stockholm were overvalued and six were in bubble-risk territory, with Hong Kong’s market the most inflated.

Chicago Stands Alone

UBS Global Real Estate Bubble Index scores 16 cities overvalued or bubble risk

Typical signs of a real estate bubble include prices rising out of sync with incomes, as well as economic imbalances like excessive lending and construction activity, the bank’s researchers said. Unlike the boom of the mid-2000s, there’s no evidence of simultaneous excesses in lending and construction, and outstanding mortgage volumes are growing at about half of the rate of the pre-crisis period, according to the report.

‘Many Years’

Property markets can be “mispriced or overpriced for many, many years,” Woloshin said. “Excesses can go on much longer than people expect.”

While prices aren’t rising as fast as in prior years, affordability remains a key concern. Housing prices in major cities increased by 35 percent on average over the past five years, according to the report. New York’s recent price decline — the first in several years — was partially due to reduced deductions for local taxes and rising mortgage rates, the bank said.

“In Manhattan the market weakness was even more pronounced,” according to the report. “Real prices fell 5 percent compared to the previous year and in the luxury segment even more.”

Incomes simply aren’t climbing fast enough to keep up with the prices in many areas. For a skilled service worker in Hong Kong, it would take 22 years of their average annual income to buy a 60-square-meter (650-square-foot) apartment near the city center. A decade ago it was 12 years.

For other cities, buying real estate is more feasible. In Milan, it would take 5.7 years of annual income; it would be under five years for Chicago, Boston and Los Angeles.

— With assistance by Suzanne Woolley, and Rob Urban

 

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