Real estate bubble as a risk: no city is as overpriced as Munich

The prices for houses and apartments are rising so rapidly that fewer and fewer people in the world's metropolises can afford property. This is especially true for two German cities: Munich and Frankfurt. The risk of a real estate bubble is acute here.

According to the assessment of the major bank UBS, Munich and Frankfurt lead the world in terms of the risk of a real estate bubble. The cities showed the clearest signs of overheating among 25 metropolises considered, said the Swiss money house. "No other city in the world is as exposed to the risk of a property bubble as Munich and Frankfurt," said Maximilian Kunkel, UBS chief investment strategist in Germany.

In its "Global Real Estate Bubble Index 2020", the bank calculated values ​​of 2.35 and 2.26 for Munich and Frankfurt – with more than 1.5 points there is a bubble risk. This puts them in front of world cities like Paris and London.

Toronto, Hong Kong, Paris, Amsterdam and Zurich are also considered to be clearly overheated with values ​​above 1.5 points. London, Geneva, New York and Sydney, among others, are rated as "overrated" with values ​​of 0.5 to 1.5 points. Munich defended its top position in the ranking and left Frankfurt, Amsterdam, Hong Kong and Toronto behind within a year. "That's an exclamation point," said study author Matthias Holzhey.

"Victim of his own success"

With the economic boom and a doubling of housing prices in a decade, Frankfurt is "a victim of its own success". The corona crisis is now becoming the litmus test of whether the high prices are justified. In Munich, the strong local economy and solid population growth continued to fuel the real estate markets, while too little new living space was being created.

UBS defines a real estate bubble as a strong and sustained deviation of the price level from fundamental data in cities – 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 city center, Frankfurt and Munich are far behind Tokyo, Hong Kong, London and Paris.

The stability of the real estate markets despite the Corona crisis can also be explained by the state aid for the economy, which saved many people from a loss of income. The real estate markets also lagged behind the economy. Despite the global recession, inflation-adjusted price growth for residential real estate has accelerated in the past four quarters. The consequences of the pandemic, such as falling incomes and more home offices, are likely to weaken the demand for housing in city centers. In contrast to prices, the direction of rents is already going down in some places.

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