Real estate bubble: According to the study, Frankfurt has the highest risk

New study
The risk of the real estate bubble continues to rise – Frankfurt is the world’s most overheated market

Center of the financial sector and the city with the highest risk of a real estate bubble: Frankfurt am Main

© Uli Deck / DPA

According to a new study by the Swiss bank UBS, the risk of a real estate bubble continues to rise in many large cities. In Germany, the real estate market in Frankfurt is most at risk.

In the past few years, real estate prices in big cities only went one way: up. Worldwide, the prices for houses and apartments in and near popular cities have increased many times over. Experts have therefore been warning against the development of bubbles for some time. A new study by the Swiss bank UBS confirms this assumption.

The money house presents the “Global Real Estate Bubble Index” every year. In this, the risks for a real estate bubble are calculated. Whether the market in a city is at risk is calculated on the basis of the housing prices compared to the average gross income of the residents.

UBS examined 25 major cities around the world. Frankfurt am Main took first place. Even ahead of cities like Toronto, Hong Kong and Munich. According to the study, no real estate market between mid-2020 and mid-2021 was as overheated as that of the Main metropolis. The inflation-adjusted prices for apartments in Frankfurt have risen annually by 10 percent since 2016, and rents by three percent per year.

Cheap money drives house prices even higher

According to the experts, there are several reasons for this global development in the housing markets. On the one hand, the demand for apartments in urban areas is still high. Real estate groups could therefore charge higher prices than usual. However, the central banks are paving the way for this business model. The European Central Bank (ECB), for example, is still pouring a lot of money into the European markets with its zero interest rate policy. The result are extremely cheap or even free loans. And these are used by real estate companies and speculators to buy living space.

As reported by UBS, the increase in outstanding mortgages has accelerated almost everywhere in recent years. A departure from this policy or stricter rules in lending could stop rising prices abruptly – a danger for the entire industry and the global economy.

Corona crisis has turned around

The corona pandemic has also caused further difficulties on the market. As a result of the crisis, population growth in some cities such as Munich had come to a standstill, but the priorities had shifted, especially due to the lockdowns and home office solutions. “The corona pandemic has pushed many people back into their own four walls,” said UBS’s head of real estate management, Claudio Saputelli.

This has led to an increased importance of living space and a willingness to pay more for a property, said Saputelli. But this is not the case in the cities, which are already unaffordable for most people, but especially in the outskirts, bacon belts and suburbs. “City life has become less attractive after the lockdowns. Economic activity has partly shifted from the city centers to outskirts and satellite towns – and with it the demand for residential property,” the study’s authors note. For the first time since the 1990s, real estate prices have risen faster outside of big cities than inside.

Frankfurt, Munich and Toronto “overheated” – Madrid and Milan “fair”

According to the study, the cities with the highest bubble risk are Munich with an index of 2.35, Frankfurt with 2.26 and Toronto with 1.96. If the value is above 1.5, the bank speaks of a risk.

UBS defines a real estate bubble as a strong and persistent divergence in prices compared to “fundamental data”. In other words, the income in the respective city, economic growth and population migration. Accordingly, Madrid, Milan and Warsaw are considered “fair” cities.

In a real comparison of the income of a qualified employee to the rental or purchase price of a 60 square meter apartment near the city center, however, the German cities of Frankfurt and Munich are far behind metropolises such as Tokyo, Hong Kong, London and Paris.

Source: UBS Global Real Estate Bubble Index 2020, with material from DPA and AFP

source site