When considering adding to your property portfolio, a major part of your research should include ensuring that you are not purchasing an asset at the height of the market, therefore limiting the scope of opportunity for capital growth, and risking possible price devaluation.
In general, cities offer potential investors good returns thanks to their high populations, employment potential, and demand for rental. However, what happens when city property becomes over-valued?
UBS recently analysed 20 developed cities across the globe to assess which are at greatest risk of a housing bubble, ranking them as either undervalued, fair-valued, over-valued or at risk of a bubble.
UBS defined “bubble territory” as a substantial and sustained mispricing of an asset , the existence of which cannot be proved unless it bursts.
Hong Kong topped the list at cities at risk of a housing bubble, with Munich, Toronto, Amsterdam and London all identified as at risk.
Housing Bubble Risk in Hong Kong
Hong Kong prices have risen by an annual rate of almost 10% every year since 2012, with incredibly high investor demand.
Matt Lavin of Benoit Properties says “We are unsurprised to see Hong Kong at risk of a housing bubble. Increasingly we are seeing a wide range of investors from the region looking to invest offshore thanks to the fact that they can purchase at a far more favourable rate elsewhere, be they single let investors, or those looking to diversify their portfolio”.
Indeed the growing trend for Hong Kong investors to purchase overseas has been rising in recent years, with Benoit Properties seeing demand from investors purchasing in areas including Manchester, Bangkok and Liverpool.
How to Avoid the Bubble Risk in London
While the UBS Global Real Estate Bubble Index score for London has declined for two years running, it still remains in the risk zone. House price growth in London has lagged behind the rest of the UK, but still remains unaffordable for many, particularly in prime boroughs.
Matt Lavin notes “UK cities do offer exciting opportunities for investors. Despite Brexit concerns, the UK does offer a safe and stable market which is well regulated. While prices in London have dipped over the past year, the city still does not offer the attractive rental yields and entry prices of Northern cities, where average rental yields are around 3% – 5 % higher than those in the capital”.
Cities at Risk in the USA
While there have been signs of a market slow-down in some areas of the USA, there are indicators that San Francisco, LA and New York are overvalued.
With a strong dollar, U.S real estate in major cities does become more expensive for those looking to invest from overseas, however Matt comments “The key to purchasing in the USA is ensuring that you are seeking out the best deal, in the best location. In areas of Florida such as Orlando, we are seeing a strong demand, but prices are still softened post financial crisis, giving buyers the opportunity to have advantage”.
As ever, when considering any investment, it is prudent to ensure that you undertake due diligence to understand the market into which you are entering in terms of both location and asset class. While the UBS research does give market indicators, this should be taken as just one area when conducting research.