While residents of Zurich will be well aware that a 5.000-franc-a-month price tag for a 1,5-room apartment is not the norm around the world, a new study by UBS has brought the city's housing crisis into even sharper relief. As part of its Global Real Estate Bubble Index, the Swiss bank found that Zurich is now the city most at risk of a housing bubble.

Global Real Estate Bubble Index 2023

To create the study for 2023, UBS analysed house prices in 25 major cities around the world to see which markets are “mispriced” or at risk of having a "housing bubble" - defined by the bank as "a substantial and sustained mispricing of an asset (in this case housing), the existence of which cannot be proved unless it bursts." This was done by comparing the average cost of buying a house in each city to rental costs, salaries and average prices on the housing market in the country where the city is located. 

They then used this comparison to generate an index score. Scores of 0,5 to 1,5 indicate that a city’s housing is “overvalued”, while scores of 1,5 or more indicate that an area is at serious risk of a housing bubble.

House prices begin to decline worldwide

For 2023, the bank found that heightened interest rates on mortgages and inflation have led to falling house prices around the world. Unlike last year, cities like Frankfurt, Munich and Amsterdam are no longer considered to be “at risk” of having a housing bubble, despite homes still being “overvalued.” 

In a statement, Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, said that globally, “In inflation-adjusted terms, prices are actually 5 percent lower now than in mid-2022. On average the cities lost most of the real price gains made during the pandemic and are now close to mid-2020 levels again.“

Frankfurt and Toronto, the two cities deemed most at risk of a housing bubble in 2022, have seen their real house prices fall by 15 percent in the last year. However, UBS noted that despite falling prices, housing has still become more unaffordable worldwide thanks to inflation, with a skilled-service worker now able to afford 40 percent less living space than before the pandemic.

Housing in Zurich remains stubbornly overpriced

Thanks to the changing picture overseas, Zurich is now the city most at risk of a housing bubble in 2023, just in front of the Japanese capital Tokyo. UBS noted that the two cities are now the only ones classed as being “at risk” of a housing bubble, down from nine in 2022. The only other Swiss city on the list, Geneva, was ranked as having an “overvalued” housing market.

The study noted that despite increases in mortgage rates, housing in Zurich remains significantly overvalued. On average, real estate in Zurich costs 50 percent more today than it did 10 years ago, with the cost of renting also rising significantly.

High demand for housing prevents falling costs

Despite the high risk of a bubble, UBS predicted that a major price correction in the housing market is unlikely in Zurich. They explained that despite higher interest rates, investors still consider property in Zurich to be “concrete gold” and that most expect interest rates to fall before house prices react.

Experts also noted that the thriving job market in Zurich is keeping demand for housing extraordinarily high, meaning that “even though purchasing a home is financially not feasible for large parts of the local population, prices may stay relatively elevated for longer.”

10 global cities most at risk of a housing bubble in 2023

In all, here are the 10 cities around the world that are most at risk of a housing bubble:

1. Zurich, Switzerland (1,71)
2. Toyko, Japan (1,65)
3. Miami, United States (1,38)
4. Munich, Germany (1,35)
5. Frankfurt, Germany (1,27)
6. Hong Kong (1,24)
7. Toronto, Canada (1,21)
8. Geneva, Switzerland (1,13)
9. Los Angeles, United States (1,03)
10. London, United Kingdom (0,98)

For more information about the study, visit the UBS website.