Cheap money and high demand have pushed up housing prices in metropolitan areas. Experts from the major bank UBS warn of a high risk of bubbles forming in two German regions. But there are also signs of a new trend leading out of the cities.
According to a study, the market for residential real estate in Frankfurt is more overheated than in any other metropolitan region in the world. According to the Swiss bank UBS, the financial center on the Main has the highest risk of bubbles. Frankfurt is thus ahead of Toronto, Hong Kong and Munich in the period under review from mid-2020 to mid-2021, as the money house reported. Were examined 25 metropolitan regions.
UBS chief investment strategist Maximilian Kunkel advises investors to exercise caution at the moment. Real – i.e. adjusted for inflation – housing prices in Frankfurt have risen by 10 percent annually since 2016. The rents have climbed by almost 3 percent every year, the real estate experts found. Cheap loans would have led to the financing of speculative rental projects. As in most other real estate markets, the Corona crisis is also showing signs of change in Frankfurt.
In view of the increasingly unaffordable living space and the new possibilities for flexible work, the population growth in the city has come to a standstill for the time being. “The urge to go to the suburbs can also be seen on the Main,” says UBS. In Munich, price growth in the city had come to a standstill, and there was even a slight rent correction. The growth is increasingly taking place in the suburbs. This also applies globally, according to the study.
Prices outside the cities are rising faster
“City life has become less attractive after the lockdowns. Economic activity has shifted in part from the city centers to outskirts and satellite towns – and with it the demand for residential property.” For the first time since the beginning of the 90s, from mid-2020 to mid-2021, prices outside the cities rose faster than inside. This development in favor of less urban areas will continue.
In its “Global Real Estate Bubble Index 2021”, the bank calculated lower values of 2.16 and 1.84 for Frankfurt and Munich compared to the previous year – with more than 1.5 points there is a bubble risk. That puts them ahead of London or New York. Vancouver, Toronto, Paris, Amsterdam, Stockholm, Zurich and Hong Kong are also considered to be significantly overheated with values above 1.5 points. Properties in Madrid, Milan and Warsaw were classified as “fair valued”.
UBS defines a real estate bubble as a strong and persistent deviation of the price level from fundamental data – such as income, economic growth and population migration. However, if you consider how much of their income qualified employees have to spend on a 60-square-meter apartment close to the center, Frankfurt and Munich are far behind Tokyo, Hong Kong, London and Paris.
UBS calculates the “Bubble Index” annually as the average of weighted standardized indicators using a factor analysis. The calculation includes: Housing prices measured against gross income and rents, housing price index in cities measured against the housing price index in countries, mortgage volume and house construction measured against economic output. Other German cities were not considered.