Dear Investors,
UBS Global Real Estate – Global Real Estate Bubble Index
Deflating bubbles
“The global surge in inflation and interest rates over the past two years has led to a sharp decline in imbalances in the housing markets of global financial centers on average, as measured by the UBS Global Real Estate Bubble Index.”
“In this year’s edition, only the two cities Zurich and Tokyo have remained in the bubble risk category, down from nine cities a year ago.”
“Formerly in the bubble risk zone, Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv saw their imbalances decline and are now in the overvalued territory.”
“Housing markets in Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney are overvalued as well.”
“Also, New York, Boston, San Francisco, and Madrid have experienced a drop in imbalances.”
“These markets are now fairly valued, according to the index, as are Milan, São Paulo, and Warsaw.
“Singapore and Dubai are fairly valued as well, even though their reputation as geopolitical safe-havens has recently triggered a surge in demand for both renting and buying there.”
Price corrections across the board
“Higher interest rates have impacted house prices differently depending on existing market imbalances and prevailing mortgage terms.”
“In Frankfurt and Toronto – the two cities with the highest risk scores in last year’s edition – real price tumbled by 15% in the last four quarters.”
“A combination of high market valuations and relatively short mortgage terms put prices also under strong pressure in Stockholm and to a lesser degree in Sydney, London, and Vancouver.”
“In contrast, in Madrid, New York, and São Paulo – cities with moderate risk valuations so far – real home prices have continued to rise at a subdued pace.”
Demand shows green shoots
“As unemployment rates in all the countries covered have remained well below their ten-year averages.”
“The ensuing high level of job security has partly cushioned the impact of rising financing costs on housing demand.”
“But inflation-driven income growth and price corrections have not been enough to meaningfully improve affordability.”
“On average, the amount of living space that is financially affordable for a skilled service worker is still 40% lower than before the pandemic began.
“More downside in prices – at least in real terms – is likely if interest rates remain at their current elevated levels.”
Charles Schwab – FOMC made a few modifications to its statement
“It noted that economic growth was expanding at a solid pace, an upgrade from the previous statement that said activity was expanding at a “moderate” pace.”
“It changed its description of the labor market, highlighting that job gains have slowed, as opposed to the “robust” job gains noted in June.”
“In describing inflation, the Fed said inflation remained elevated, which should be no surprise considering that most inflation readings remain well above the Fed’s target.”
Are we at the peak in the federal funds rate for the cycle
“The median dot for next year suggests a year-end rate of 5.1%, compared to a median projection of 4.6% at the June meeting – a 50-basis-point difference.”
“In other words, Fed projections suggest a “higher-for-longer” interest rate environment.”
Summary of economic projections
“The Summary of Economic Projections (SEP) indicated that the Fed is looking for gross domestic product (GDP) growth and inflation to slow over the next year.”
Jerome powell’s comments
“The Fed doesn’t appear confident about reaching its goal of 2% inflation in the near term, but does believe policy is currently “restrictive,” or tight enough to slow growth and inflation.”
“He was referring to the high level of real yields – adjusted for inflation – which have reached levels not seen since 2008.”
“High real yields tend to dampen consumer spending and business investment.”