Global Housing Bubble Risk Declines? Singapore Property Market Reaches Fair Value

Surging inflation and mortgage rates have driven down global property prices, reducing real estate bubble risks worldwide. Only two cities face property bubble risk this year—seven fewer than last year—while Singapore's home prices have also stabilised slightly.

According to the Global Real Estate Bubble Index 2023 released by UBS on Wednesday (20 September), Singapore's bubble risk index stands at 0.47, placing it in the fair-value category and ranking 19th among the 25 major cities surveyed. Last year, when more markets faced elevated bubble risks, Singapore recorded a score of 0.5, falling into the slightly overvalued category and ranking 21st.

The report noted that housing supply in Singapore has struggled to keep pace with strong demand from both local and international buyers since 2018. Real prices have risen by 15% to date, despite tighter cooling measures. Local residential rents surged by approximately 40% over the same period. Overall, however, the local housing market is currently considered fairly valued.

Across all 25 cities surveyed, real home prices fell by an average of 5% between mid-2022 and mid-2023, with prices expected to soften further.

Although incomes have risen due to inflation and home prices have undergone a correction, the modest price declines mean homeownership remains out of reach for many. The average living space a skilled service worker can afford is still 40% lower than before the COVID-19 pandemic. Should mortgage rates remain at current elevated levels, real home prices are likely to continue drifting lower.

Nonetheless, green shoots of growth have emerged in selected property markets, particularly in European city centres, where a shortage of new housing supply could support prices.

Latent housing demand continues to build, and property prices could rebound once household financial conditions improve.

Zurich and Tokyo Face Bubble Risk

The two cities at risk of a housing bubble this year are Zurich and Tokyo. Seven cities that were in this risk category last year—Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv—have exited the bubble risk zone and moved into the "overvalued" category. Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney also remain overvalued.

Nominal owner-occupied home prices in Zurich are now more than 50% higher than a decade ago. An influx of high-earning buyers and ultra-low mortgage rates have underpinned price gains, with growth showing little sign of abating despite rising borrowing costs.

Tokyo's housing market faces severe imbalances, having transitioned from being "undervalued" 20 years ago to bubble-risk territory today. Spurred by favourable financing conditions and population growth, Tokyo home prices have risen consistently for more than two decades, decoupling from the rest of Japan.

Hong Kong Property Prices Drop 7% Recently

Hong Kong, which has faced bubble risk for years, has also seen notable shifts recently.

Real home prices in Hong Kong tripled between 2003 and 2018, even as wage growth stagnated and inflation-adjusted rents climbed 50%. However, prices slid 7% between mid-2022 and mid-2023, bringing inflation-adjusted home prices back to 2017 levels.

While Hong Kong's population has gradually rebounded over the past four quarters, household borrowing has stabilised, and rents have held flat. Nevertheless, higher interest rates and a sluggish economic recovery in mainland China have dampened housing demand. With incoming supply on the rise, the territory's residential market is expected to remain soft in the near term.

In London, property prices have remained lacklustre, trending downwards since the 2016 Brexit referendum. Despite structural supply shortages, price performance has lagged the UK national average. Without strong momentum from international buyers, prices will continue to face downward pressure as housing affordability for locals has plunged to its lowest point since 2007 amid elevated mortgage rates.