The housing markets in Frankfurt and Munich remain significantly overheated, according to the latest Real Estate Bubble Index by UBS, but rising inflation and economic uncertainty could mean that the bubble is about to burst, sending house prices tumbling. 

Real estate in Frankfurt and Munich among most overpriced in the world

The Swiss bank has been the latest in a long line of financial experts to warn that rising interest rates and the increasing cost of mortgages could soon spell the end of years of booming on the German real estate market - and the markets that have climbed highest have the furthest to fall.

Every year, the UBS Global Real Estate Bubble Index looks at residential property prices in 25 major cities around the world to pinpoint where they are “substantially and sustainably mispriced” - which is defined by looking at the ratio of house prices to salaries and the average cost of rentals, as well as national house prices. 

Once again, the 2022 index found that house prices in two German cities - Frankfurt and Munich - show “pronounced bubble characteristics”, along with Toronto, Zurich, Hong Kong, Vancouver and Amsterdam, meaning that housing in these cities can be considered significantly overpriced. This year, Toronto actually overtook Frankfurt (which last year came top of the list) to rank as the city with the highest “risk of bubbles” in the world. 

As UBS explained, low interest rates have allowed house prices to decouple from regional incomes and rents over the past 10 years. In both Frankfurt and Munich, property prices have more than doubled over the last decade as a low vacancy rate combined with high investment demand to drive up prices. Although migration to Frankfurt has stagnated since the coronavirus pandemic, the trend towards smaller households continues to fuel the shortage of housing.  

Price corrections expected as housing market cools

However, as UBS noted, there are some signs of cooling: between mid-2021 and mid-2022 growth on the real estate markets in Frankfurt and Munich slowed to around 5 percent, down from double-digit levels. The analysts point out that higher mortgage rates are curbing affordability just as high inflation is reducing household purchasing power. 

“The boom is coming to an end,” Maximilian Kunkel, chief investment strategist at UBS Germany, told ARD. UBS said it expects the consequences to be severe for real estate prices, especially in areas where they are already overpriced: “significant price corrections are to be expected” in the coming months, the analysts warned. 

The most overpriced cities in the world

According to the latest UBS index, these cities have the most overheated housing markets in the world: 

1. Toronto
2. Frankfurt
3. Zurich
4. Munich
5. Hong Kong
6. Vancouver
7. Amsterdam
8. Tel Aviv
9. Tokyo

You can read the full report on the UBS website.