9-28-17 7:01 AM EDT | Email Article
By Brian Blackstone 

Blame Canada?

It isn't just the tune made famous by the South Park movie. It may become a motto among economists if frothy housing values around the world turn into a destabilizing bubble.

UBS published its latest global real estate "bubble index" on Thursday, listing the major cities most at risk of housing bubbles. Canada took two of the top four spots, with Toronto on top and Vancouver at number four, and Northern Europe's Munich and Stockholm sandwiched between.

U.S. cities featured pretty highly, with San Francisco and Los Angeles in "overvalued," but not bubble territory. New York was deemed fairly valued, and Chicago was the only city in the 20 listed that was undervalued.

Concerns over asset bubbles have regained steam as improved world economic growth, low unemployment and ultra-low interest rates have pushed up asset values. With stock prices near record highs and interest rates near zero, or even negative in some countries, real assets like housing have become more attractive, particularly in countries considered havens.

The problem occurs if a shock hits the global economy that makes it harder to pay off debt, or if central banks raise interest rates more aggressively, pushing borrowing costs higher.

Boston Federal Reserve President Eric Rosengren alluded to the dangers of high asset prices in a speech Wednesday, without referring specifically to housing.

"Trends, as best I can see them at present, suggest to me an economy that risks pushing past what is sustainable, raising the probability of higher asset prices, or inflation well above the Federal Reserve's 2% percent target," he said.

UBS lists Boston's real-estate market as fair-valued. Its uses sub-indexes such as price-to-income and mortgage-to-gross domestic product ratios to construct an overall index. Index readings above 1.5 are in bubble territory and the overvaluation scale slides down from there.

UBS noted that Toronto and Vancouver weren't "dragged down" by the global financial crisis, as a weaker Canadian dollar cushioned the blow. "Overly loose monetary policy, for too long, in addition to buoyant foreign demand, unmoored their housing markets from economic fundamentals--and both markets are now in bubble risk territory."

"A strengthening Canadian dollar and further interest rate hikes would end the party," the report added.

In the U.S., housing prices in cities are still below their 2008 peak in inflation-adjusted terms, UBS said, except for San Francisco which "shows signs of overvaluation but no bubble risk, given its strong economic fundamentals amid the astonishing boom of tech companies."

Turning to Europe, UBS said that "improving economic sentiment, partly accompanied by robust income growth in the key cities, has conspired with excessively low borrowing rates to spur vigorous demand for urban housing."

In the Asia-Pacific region, Tokyo shows "moderate signs of overheating" since the Bank of Japan launched its quantitative easing program in 2013, while residential prices in Hong Kong reached all-time highs mid-year "thanks to insatiable investor demand and speculative price expectations."

UBS's home base, Switzerland fared pretty well. Zurich and Geneva were deemed overvalued, but only "moderately" so.

Write to Brian Blackstone at brian.blackstone@wsj.com

 

(END) Dow Jones Newswires

September 28, 2017 07:01 ET (11:01 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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