UBS: City homes out of favor for the first time in 25 years

The pandemic has resulted in a shift in demand to non urban areas as city living is out of favor, says UBS which published its Global Real Estate Bubble Index for 2021.

City life has suffered a considerable blow from lockdowns, as entertainment and shopping options were reduced and city-center offices were largely abandoned. The cost-benefit ratio of urban living has taken a sharp turn for the worse.

Economic activity has instead spread outward from city centers to their suburbs and satellites—and so has housing demand along with it.

“Consequently, for the first time since the early 1990s, housing prices in non-urban areas have increased faster than in cities since mid-2020,” UBS highlights.

Topping its Global Real Estate Bubble Index for this year is Frankfurt, Toronto, and Hong Kong. Next on the list come Munich and Zurich, while Amsterdam and Paris are also high on the ranking.

“House price growth in the cities analyzed accelerated to 6% in inflation-adjusted terms from mid2020 to mid-2021, the highest increase since 2014. All but four cities—Milan, Paris, New York, and San Francisco—saw their house prices increase. And double-digit growth was even recorded in five cities: Moscow; Stockholm; and the cities around the Pacific, Sydney, Tokyo, and Vancouver,” says the report.

A combination of reasons have sparked this price bonanza, says UBS.

Predominantly, the coronavirus pandemic has trapped many people within the confines of their own four walls, amplifying the importance of living space, and leading to a higher willingness to pay for housing. At the same time, already favorable financing conditions have improved even more as lending standards have been relaxed. Moreover, higher saving rates and booming equity markets have freed up additional housing equity.

But risks linger as price hikes mean that households need to borrow more to acquire homes and property becomes less affordable.

“Overall, housing markets have become even more dependent on very low interest rates, meaning a tightening of lending standards could bring price appreciation to an abrupt halt in most markets,” it added.

In Europe, imbalances remain sky-high.

“Overall, price increases have slowed down over the last year and fallen behind the respective national averages as city centers have become less affordable and demand has shifted to the suburbs and satellites. Nevertheless, a price correction is not imminent as long as job creation within these cities remains strong and interest rates stay negative,” it added.