UBS report: Negative interest rates pose risk of real estate bubble

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A UBS report has revealed that record low interest rates are pushing real estate prices upwards, which increases the risk of a real estate bubble in several cities.

According to analysts at Swiss bank UBS, some cities in Europe are currently in or almost in a real estate “bubble risk zone,” which means that prices could suddenly drop after rising steadily for years. The report also identifies Hong Kong and Toronto and Vancouver in Canada are also at risk of a bubble.

The UBS Global Real Estate Bubble Index, now in its fifth year, provides an analysis of residential property prices in 24 major cities. It examines trends in the relationships between prices, incomes, rent costs, economic growth and construction activity.

With the Brexit affecting London as an investment destination, other global cities have become more attractive. However, Matthias Holzhey, one of the authors of the report, pointed out that low interest rates have an even bigger impact in pushing real estate valuations upward in countries that use the euro.

Holzey argued that weak economic growth in the region would make things “fragile” despite no rate increases, which serve as a trigger for housing market correction, expected in the near term.

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In September, the European Central Bank pushed interest rates further into negative territory and announced a fresh stimulus package to boost the weak economic growth. However, the effect was instead of encouraging businesses and consumers to borrow and spend more, it allowed owners of financial assets to borrow heavily at very low costs to invest more into property or stocks to look for better returns.

The UBS report also found that despite Brexit, London properties are still unaffordable. It stated: “Despite the recent price decline, even a highly skilled employee needs to work 14 years to buy a 60m2 flat near the city center.”

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