Real estate bubble or demand boom?

In just two years, the ratio of employees working remotely in the world’s richest countries has increased from 15% to 25%-30%. This situation, in addition to the rapidly increasing demand for housing, has multiplied the interest in housing models that have features that better suit working from home, have larger balconies or even a small garden. Amid the new normal since the coronavirus, 26% of employees in the U.S. are working from home, around one in four. According to institutions that closely monitor the U.S. employment market, at least 22% of the working population (36.2 million) will continue to work remotely from home in 2025, even if the global pandemic ends.

This shows that during the pandemic, households were unable to spend on non-durable goods and services such as tourism. According to International Monetary Fund (IMF) estimations, especially in developed countries, $7 trillion in savings has been accumulated and this accumulation is now being directed towards real estate. However, this trend has also triggered serious increases in real estate prices in some countries. So much so that in the last year alone, housing prices in the U.S. have increased by 19.8%, representing the highest annual increase of all time. As mortgage-backed real estate loans continue to grow at the same pace, the Fed continues to buy $40 billion of mortgage bonds each month. The mortgage bond portfolio on the Fed’s balance sheet has reached $2.5 trillion.

The balloon index

The Real Estate Balloon Index 2021 study, published by Switzerland’s world-famous financial institution UBS on Oct. 5, which takes into account the housing prices of 25 cities in the world, indicates that real estate prices have increased by double digits in Moscow, Stockholm, Sydney, Tokyo and Vancouver. In Europe, Frankfurt, Munich, Amsterdam, Zurich and Paris stand out. It is interesting to note that while Tokyo has regressed and is at medium-level risk of a price bubble in Asia-Pacific as is Sydney despite its double-digit increase, Hong Kong stands out with its high housing market bubble risk. Toronto is another city in Canada that signals a balloon risk, although it did not increase at the same rate.

Moscow is the city with the highest price increase, both including and excluding inflation. Despite the over 20% price increase, the price bubble risk level is still medium. Frankfurt, on the other hand, is at the top of the 25 megacities with a price increase of 10% in the last five years, adjusted for inflation, and carries a very high bubble risk. Amsterdam and Moscow follow Frankfurt with their price increase performance over the last five years. Despite the price decline in the last year, with an average price increase of 5% over the last five years, Paris still maintains its position as a megacity with high bubble risk, while it is interesting that New York and San Francisco are behind both on an annual basis and considering the average of the last five years. While San Francisco has experienced five price drops over the last year, the four worst-performing cities are Dubai, which has experienced a 5% decline in prices on average in the last five years, and London, New York and San Francisco, which have experienced a price decline of 1% or less.


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