You might think that 8.000 - 9.000 euros per square metre is a small price to pay for having great job opportunities and a top-notch quality of life, but according to a new study by the Swiss bank UBS, these prices are unsustainably high. The housing market in Munich has therefore topped the list as the most overpriced in the world. And the situation in another German city is also looking precarious... 

Global property market is cooling off

Every year, the Swiss bank UBS conducts an overview of the real estate market in cities that are deemed attractive to investors. This year’s Global Real Estate Bubble Index examined the situation in 24 major cities worldwide to determine where has the highest risk of a property price bubble - defined as the “substantial and sustained mispricing of an asset”.

In order to establish whether a bubble exists, the UBS analysts compared house price valuations with several key figures, including the ratio of house price to income, the ratio of house price to average rent, and the value of a city’s real estate compared to the national average. 

Overall, the study found that inflation-adjusted prices have “come to a standstill”, with price growth rates continuing to slow in the majority of cities. Real prices in the four top-ranking cities from the 2016 ranking have fallen on average by 10 percent. The price bubble risk has therefore “markedly declined” in Vancouver, San Francisco, Stockholm and Sydney. Even London is no longer considered “at risk”, but merely “overpriced”. 

Housing in Munich is the most overpriced in the world

In Munich, however, the situation looks very different: the Bavarian city now sits right at the top of the list, with a bubble risk index of 2,01. The study points to the city’s strong local economy and growing population as reasons for the growth in demand for housing, which has in turn increased inadequately. As a result, real prices in Munich have more than doubled over the past 10 years. Rents have risen by an average of 40 percent. 

While salaries have also gone up, the paltry increase of 15 percent is nowhere near enough to compensate for this development. As the study’s authors note: “For the purchase of a 60-square-metre apartment near the city centre of Munich, a qualified worker in the service sector must raise eight times their annual income.” 

Frankfurt at risk of a real estate bubble

But Munich is not the only city in Germany where things are getting out of hand - in the 2019 Bubble Index Frankfurt has also entered the bubble risk zone for the first time, ranking 5th overall. Last year, real prices in Germany’s financial capital rose by 11 percent, the highest rate of all of the cities covered in the report. Every year for the past 10 years, price growth in Frankfurt has outpaced the country average. 

And with demand in Frankfurt higher than supply, house prices and rents will continue to rise. Maxamilian Kunkel, UBS’s investment strategist for Germany, says that investors should therefore exercise caution when considering buying a house in these regions of Germany.  

2019 Global Real Estate Bubble Index

The full ranking for the 2019 Global Real Estate Bubble Index was as follows:

Source: UBS