Bank Risk of a real estate bubble remains high in Zurich and Geneva

In Zurich and Geneva, the risk of a bubble in the housing market remains high by international standards, even if it has recently eased. Zurich is now ranked third in the global real estate bubble index 2024 compiled by UBS.

Last year, the city on the Limmat was still in first place. Overall, the risk of real estate bubbles has fallen on average for the second year in a row, the major bank noted. In Zurich, the bubble risk score for residential real estate even fell significantly compared to the previous year to 1.51 after 1.71 points a year ago. Only Miami (1.79 points) and Tokyo (1.67) have an even higher bubble risk.

There is currently an increased risk in Los Angeles (1.17 points), Toronto (1.03) and Geneva (1.00), while the UBS experts consider the risk to be moderate in Amsterdam (0.98), Sydney and Boston (both 0.78). The global cities of Paris (0.35), New York (0.37) and London (0.41) are at a comparatively low level in the index.

Falling real estate prices reduce risk

For the study, UBS analyzed residential property prices in 25 major cities. The basic rule is: the higher the prices, the greater the risk of a real estate bubble. Prices have recently fallen overall. According to UBS, they are currently around 15 percent below the mid-2022 level on average, adjusted for inflation.

The sharpest corrections in real estate prices have occurred in cities such as Munich, Hong Kong and Paris, which have exhibited a very high bubble risk in recent years. However, sharp price declines were also seen in Vancouver, Toronto and Amsterdam, according to the report.

There were only limited signs of easing on the part of owner-occupied homes, where price growth has been subdued in recent quarters. While the corrections in Paris and Hong Kong continued, prices in Dubai and Miami continued to rise. And in Zurich, too, the purchase of owner-occupied residential property costs almost a quarter more than five years ago.

Housing shortage as a price stabilizer

UBS real estate expert Matthias Holzhey stated in a telephone conference that price pressure is limited in many urban housing markets. The main reason for this is the increasing housing shortage in most cities, which is also affecting Zurich.

This effect is likely to continue, as the population in cities is growing and at the same time less living space is being created in urban areas. Rising construction costs, a lack of building land and declining building permits are leading to a further shortage on the residential market.

According to Holzhey, it remains to be seen whether there will be another real estate boom and thus a growing bubble risk. A decisive factor will be how well the economy performs in the coming quarters and how quickly the monetary authorities continue to tighten interest rates.

Buying residential space generally increases in an environment of falling interest rates, as credit financing becomes more affordable. After the European Central Bank (ECB) and the US Federal Reserve, the Swiss National Bank (SNB) could also cut interest rates further next Thursday, giving the real estate market a boost.

SDA