Housing bubble risk deflates across the world - except in one European city

The risk of a real estate bubble has shrunk globally following price corrections in 25 cities across the world, according to a study by Swiss bank UBS.

According to the latest edition of UBS's Global Real Estate Bubble Index, published on Wednesday, only two cities -- Zurich and Tokyo -- remain in the "bubble risk" category, down from nine cities last year.

Frankfurt, Munich and Amsterdam are the European cities which have dropped to the lower-risk "overvalued" category, to join Geneva, London, Stockholm and Paris, which remain unchanged from the previous year. 

Madrid has also seen a drop in property price imbalances, according to UBS, meaning it's now "fairly valued", alongside Milan and Warsaw.

A real-estate or housing bubble occurs when property prices rise at a rapid and unstainable pace due to an increase in demand and limited supply. At some point, demand suddenly freezes or decreases, leading to a sharp drop in prices which bursts the bubble.

UBS puts the general decline in housing market imbalances down to the current economic climate, which has seen a global surge in inflation and interest rates over the past two years owing to Russia's invasion of Ukraine and the COVID-19 pandemic, among other factors.

From mid-2022 to mid-2023, real house prices in the 25 cities UBS examined fell by 5% on average, the bank said, adding that further downside in prices is likely.

The biggest fall was seen in Frankfurt and Toronto, according to UBS, which both saw prices tumble by 15%. The two cities had the highest risk scores in last year’s edition of the UBS report.

"Low financing costs have been the lifeblood of global housing markets over the past decade, driving home prices to dizzying heights," the authors of the report said.