Which Cities Have the Highest Risk of a Housing Bubble? | Hacker News Reader

Which Cities Have the Highest Risk of a Housing Bubble?

statista.com

49 pointsjman123468 comments

My friend likes to say, Toronto housing prices could collapse by 50% and my $400k dollar house in 2005 will still be worth over a million. I don't think there are a lot of folks that realize how much some areas of Toronto have increased over the last 15 years. It is not uncommon to have the a buyer from Asia purchase a house for 200-300k over asking and not even move in, or the buyer is a Chinese UoT Student and buys a 1.8 million dollar house. It is beyond insanity and even a crash won't bring it back to reality.

I bought a (rather large) condo in 2015 for just shy of $600k. In 2017, the same unit in my building on another floor sold for over $900k. 50% increase in value while we did nothing.

That's not normal. That's a bubble.

That said, the prices haven't gone up in 3 years now- no one is getting $900k for this unit anymore.

> It is beyond insanity and even a crash won't bring it back to reality.

You don't appreciate the power of "crashes" or multi year "slow bleeds". Ultimately housing prices always recovered to their inflation adjusted average, Robert Shiller wrote a lot on this topic. Both from being undervalued and from being overvalued. The only thing that's always unclear is the path.

Note that this implies two exists from the situation, or a combination: CPI will go much higher or nominal housing prices will go much lower. 1970s saw the first variant, 1930s and late 2000s saw the second variant.

Also, if you want to see true insanity compare Chinese big city apartment prices to salaries and CNY interest rates. That is true insanity. No other country comes even close to what's going on there (maybe 1980s Japan? I suppose it's close). It has a lot to do with chinese people having strong conviction in government's support of the market, kinda like the US equity market is now widely believed to be completely supported by whatever means will necessary. Time will tell how much such self-fulfilling illusions last.

The inflation part is pretty key. $M2 has grown from about $7T to $18T, so if anything, housing prices have tracked monetary inflation. It's just that the CPI has severely lagged monetary inflation, possibly because of cheap food prices, cheap oil, cheap microchips, and cheap goods from China.

There's a macroeconomic story for that: with roughly 80 million Millenials (in the U.S; ~3B worldwide) reaching homebuying age and competing for a housing stock that's not growing nearly as fast, the ability to buy a house moves up the income ladder, so that sellers can capture money from an increasingly wealthier homebuying population. Meanwhile, those ~3B worldwide Millenials are entering working age, driving the price of labor (and hence of anything built with labor, including food and manufactured goods) down. CPI of goods & non-professional services goes down, price of assets goes up.

This demographic trend reverses itself in about 10-15 years as the comparatively tiny Gen-Z reaches homebuying age, but in the meantime there'll be an even bigger pop as late Millenials (1990-1998) reach homebuying age and there are nowhere near enough homes for them all. I'd also expect inflation to start showing up in the CPI as Gen-Z starts to make up the new workforce entrants, boomers start dying off, and hence the labor force shrinks and wages go up.

It's worth pointing out that in most developed countries (but not the US), there are far fewer millenials than there are boomers. Also, most residential real estate in developed countries is owned by boomers, and the oldest boomers (right now, this year, in 2020) are entering their final years (age 75). I think even within 5 years most mid-tier cities in the developed world that aren't hopelessly supply-constrained will see huge drops in residential home prices.

Life expectancy among the homeowning demographic (~top 3 income quintiles) averages about 85:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4866586/

Barring things like a mass COVID die-off (certainly possible), I still think it'll be 10-15 years before we see a large transfer of homes away from boomers.

If anyone wants to know about the last crash in Toronto in 1989:

> Once adjusted for inflation you can see the real scope of the Toronto housing bubble of 1980s. Only in 2010, or 21 years later, real average housing prices reached the peak of 1989.

* http://www.torontocondobubble.com/2013/02/toronto-housing-bu...

* https://betterdwelling.com/city/toronto/it-took-22-years-for...

It took ~7 years for prices to bottom out before starting to rise again.

Lately condo prices have been softening (supposedly due to Airbnbs folks offloading), but (semi-)detached houses are still going up. Rents have also been dropping due to Airbnbs giving up on 'short-term rentals' (read: mini-hotels) and switching to long-term rentals.

What can we learn from that bubble to help us tell whether this one is close to bursting?

I don't think we can learn anything. The whole dynamic is different. Interest rates, BoC/FED Gov are too invested in keeping the market going to allow it to correct. People have stretched themselves to the limits with debt. Then you have incredible capital outflows from Asia just parking money in Canadian Real Estate.

For ever distressed Canadian sale, there will be 100's of billions of foreign $$$ waiting to snatch it up.

It is truly remarkable what a young Canadian faces today when it comes to enjoying what previous generations took for granted. A good job or career, a house or property, etc. It just isn't going to happen for the majority of them.

If this was really the case, wouldn't we expect large numbers of Canadian homes to be sitting empty? Or to have a rental market with high vacancy rates at the expense of a tight sales market? In Vancouver at least, we don't see either of those. But the population keeps exploding (2%/year for the metro area) and people keep protesting development. What's the most straight-forward explanation for this?

> For ever distressed Canadian sale, there will be 100's of billions of foreign $$$ waiting to snatch it up.

There seems to be a feeling that not enough is being done about money laundering, and that's not helping the real estate situation:

* https://betterdwelling.com/how-a-little-money-laundering-can...

Canada seems to be so popular what we have our own verb, "snow washing":

* https://en.wikipedia.org/wiki/Snow_washing

From A. Gary Shilling:

> Of course, you need to keep in mind that the stock market can remain irrational a lot longer than you can remain solvent.

* https://quoteinvestigator.com/2011/08/09/remain-solvent/

* https://en.wikipedia.org/wiki/Gary_Shilling

Don't treat your home as an "investment" is probably the best advice: simply a nice place in nice location that you want to spend the next decade or so, and move on with life.

Any gains you see financially will be decades down the road when (a) you don't have rent to pay after the mortgage is paid off†, or (b) you can no longer live independently and sell it to pay for an old-age home.

† But taxes and maintenance still exist.

Toronto housing prices are still way lower than other comparable cities. The condo market will take a covid hit with airbrb rentals much lower but it is a great time to buy.

A condo? Houses are still insane

When out-of-area buyers are pricing out locals, that is a giant problem. Fortunately more remote work will mitigate this a little bit, as China presumably won't buy all of Montana or Wyoming or Nevada.

The referenced research is much more interesting:

https://www.ubs.com/global/en/media/display-page-ndp/en-2020...

It mentions New York as only very slightly overvalued. I'm having my doubts about their methods.

NYC is NYC. There is an army of wealth who would never suffer the loss of caste incurred by leaving.

House prices in capital cities are telling of how much confidence we have in our world and the economy.

In Australia, we give out home loans for 30 year periods. Nearly 100 years ago, it was unthinkable to loan out money for that long (2 world wars fit into a 30 year window).

House prices are high because interest rates globally are low and the borrowing period is far into the future. I'm unsure what kind of market force is required to change this and I really hope we don't see 40 or 50 year loans.

I don't think a 30 year loan is really intended to last 30 years. At some point you will refinance, or overpay to get it paid quicker. The longer loan term gives you flexibility to not be forced to pay as much principle, but anyone taking a 30 year loan should have a plan to increase their income or something (or reduce their lifestyle) and knock some chunks out of that.

If you can "handle" it, and most people can't, maybe me included - it is logically better to have the money as an effective LOC in an offset than paid off the loan. That gives you more flexibility. (Unless you want to take out other loans, say for a business, then it might work against you).

In theory the best loan would be interest only. Assuming you have the discipline to do something better with that money you were going to pay back - and assuming you get as good a rate (which you wont). So in practice NO but if you have discipline and get a good rate, a loan that you are not forced to pay back (other than interest) is a good thing!

My point is that you can borrow more if the payback duration is longer.

More borrowing power means buyers can pay more which fuels the fire of the perceived bubble that we're in now.

There are already mortgages over a century in Sweden [0], and they changed the legal limit to be a maximum of 105 years for mortgages [1].

[0] https://archive.is/b1xWM [1] https://www.thelocal.se/20160324/sweden-limits-mortgage-loan...

Indeed and they were trialing negative interest rates as well since 2016

The whole aspect and shift in interest rates over the decades has been a major part in the whole housing market. You had high interest rates, people saved for a lifestyle. The shift to lower interest rates has changed all that and shifted towards a a lifestyle today on credit. That shift alone has had much impact upon society - some good, some bad and I'd learn towards the later in more areas than not, though that whole debate can be subjective.

So here we are today, with interest rate buffers mostly eaten up and QE left with no more room due to that, the next thing will be negative interest rates. How that will impact the whole housing market will be interesting.

But one other aspect about housing. Culture factors do come into play and some countries tend to rent and others tend to buy. Though would need a chart of countries and the rent/ownership to over time to get a better grasp upon that and not aware of anything that shows that at hand. Though a good insight into that at https://www.rentcafe.com/blog/rental-market/renting-landscap...

Though with the whole motivation to embrace the digital age with work from home, there will imho be a shift from buying into large cities for the commute and a shift into the countrysides. But then, the best data for that would probably be Amazon and a heatmap of deliveries over time - which would be fascinating to see.

But signs to look for would be office towers owners in cities applying for planning permission to convert into residential. Which will be needed if the shift is to save some of the many many city based food outlets/resturants/arts etc that need the volume of people that cities offer and without those numbers, will domino.

But many area's have been overdue a reality in prices, New york rental market is the next financial timebomb and all due to how finances are worked out, so if you can have high rent, you can value that place more and mortgage/finance accordingly. Indeed it gets to the stage that the legal finances mean that if you set a high rent, you have to charge that rent as no leeway to charge lower due to the financial contracts in-place and how financed. But many housing/building values have been riding the wave of financial hype as much as supply and demand. So COVID if anything, won't cause any issues, just speed them up and that in itself is the issue as a slow shift more palatable over an almost instant overnight shift.

Though even with COVID, the human population still grows and grows, so always that aspect for the whole supply and demand factor.

It occurs to me that a bubble is sort of unique, it's not just being high in the distribution. A bubble is where some odd factor causes a massive inflation in an asset that will eventually drop precipitously when there's a correction. What we see with this ratio though is almost the oppsoite. You've just got a fairly reasonable distribution of "bubble risk", it's not like a handful of cities are way out of whack. It's more like there's a sliding scale and naturally some cities are further along it than others. It sort of makes sense that real estate is valued higher in the EU where there are fewer alternative investments that can achieve good returns.

Also, I don't really know what the point of having these individual ratings. Surely this is a highly correlated issue? If Frankfurt's prices collapse would you expect Paris to face issues?

Doesn't make sense. Uses price-to-rent, mortgage-to-gdp etc. Mortgage rates are between 0.8 and 1.8% here. Rent is about equal to the interest paid. Also, using the GDP for major cities is wrong.

Eventually those mortgage rates will go back above 4%, and what happens to housing prices when they do ?

The central bank won't let housing prices go down significantly, so rate will not increase rate back above 4% for a while.

oh, is it that easy?

It is that easy. Markets a booming, housing is booming, everything is booming because money of inflation by QE.

The cannot stop. At least not with the current currencies.

Ever heard of inflation? How can mortgage rates stay below inflation rates after massive money supply increases?

Yes, because mortgage rate is essentally set by supply of funds buying mortgage bonds and demand of people getting mortgages.

The Central Bank could just buy the mortgage bonds by putting the mortgage on the asset side of the book and issuing currency on the liability side of the book. The Bank of Canada only does this to manipulate the overnight interest rate, on Government of Canada bonds. However, all rules have been thrown out the window these days.

They will keep paying their 1%, as it's fixed for 10-30 years. In the mean time, inflation will catch up, and the house will be paid off.

Look at Japan's interest rates. It's not gonna happen, because it will destroy a complete country and surroundings.

In Toronto mortgages don't work this way. Fixed rate mortgages are typically 5 year terms. After the term is up they'll have to get the higher interest rate.

Well that's all up to the buyer, but most people are risk averse when it comes to their home. The default mortage term is 30 years, and most people fix the interest rate 20 or 30 years.

People who took a shorter term for the interest rate in the past 10 years, now have a housing cost of a few hundred euros, because it came down from 3-4%.

Mortgages where the amortization period and the term are equal are extremely rare in Canada. Most Canadian fix their interest for a term of 5 years (at a fixed rate or a fixed deviation from the prime rate).

lol, I hope you didn't sign on a mortgage and got amortization and term mixed up...

There's perhaps some regional confusion here. In the U.S, with conventional 30-year fixed mortgages, amortization and term are the same (30 years). There are also adjustable-rate mortgages which have a different term, eg. a 7/1 ARM has a fixed rate for 7 years, adjust annually thereafter, and is paid off in 30 years. Although ARMs are occasionally pushed by banks, most finance sites recommend against them and savvy buyers usually steer clear, because lots of buyers got in a lot of trouble from 07-09 because of them.

I gather, from this thread, that this is not the case in Canada and some other locales. But in the U.S, if you have a fixed-rate mortgage, your interest rate is fixed for the full length of the loan. It sounds like the OP is from Europe, where I guess things work similarly.

I’m not saying you shouldn’t lock down these amazing rates for the long run.

I’m saying that when mortgage rates double, the cost of buying homes will effectively double. Buyers simply won’t be able to afford to pay as much and prices will plateau or even dip.

There are people paying 1M for hones in my neighborhood that sold for 500k ten years ago because their mortgage will be only $2K a month. When it’s $4K a month those buyers are gone. That’s why I’m selling soon.

Price-to-rent and price-to-income ratios are useful metrics in diagnosing if a price rise is a true 'bubble' in the sense of misdirected investment. If the price to own is rising much faster than rentthe assumption is that excess capital is being directed into the market, rather than price rises driven purely by demand for housing. During the Great Bubble of the early 2000s, downpayments shrank and credit quality dropped as riskier and riskier (and blatantly fraudulent) credit practices were employed to prop up the market.

The thing is, it's not. It is the exact opposite until this quarter..

The price-to-rent here is more and more in favor of buying, even with prices up 100%. So I don't know what numbers they're looking at. This, partially, was stopped by limiting airbnb days per year and in certain parts completely. Also, the current covid situation is not helping for cities.

There is no risky credit anymore, it's more difficult to get a mortgage.. You need to bring quite some cash yourself, as they won't finance as much as they used to. And then some people don't even use financing at all, and simply pay cash.

Interesting observation Re. Chicago from infographic - "The only city with an “undervalued” housing market according to the survey was Chicago."

Sorta makes me think that UBS is working on pure financials and not factoring in the actual things depressing Chicago house prices:

- Political and state-level financial stability risk (the entire state is a stock market hiccup away from bankruptcy)

- Catastrophic and increasing murder rate, which is only getting worse (not to mention other less-fatal crime)

- Deteriorating public schools driving wealthy families out, or at least to suburbs

I don't think Chicago is (yet) lined up to be a new Detroit, but there are real reasons to undervalue Chicago house prices right now...

I grew up in Chicago and left. The areas plagued by gang violence are actually the best in terms of home value to rent ratio for the landlord. Everyone else isn't effected by the violence. Public schools in the city are better than in the suburbs. The real reason that the future isn't bright is mostly the horrible fiscal situation and the god awful weather.

Chicago and the rest of Illinois are in a dreadful fiscal situation with underfunded pension liabilities. Anyone who buys real estate there will eventually be hit with higher taxes and lower services. Buyers are probably factoring that in.

And the high property taxes that will only get higher have a direct impact on home value.

Are people really that savvy? Somehow I expect most people are more thinking where they feel like living, and where they can get a good job, then buying a home they can afford there.

Even un-savvy people can see price history and property tax history. I would guess most people are stuck where they are simply because they don't want to lose access to their friends/family, but for higher income/able to move workers, it's not difficult to see which way land prices/property tax are trending.

Well, that, and the fact that anyone who buys a house pretty much anywhere will eventually be hit with higher taxes and fewer services. So for a lot of people, that's probably not being factored very highly because the same thing is happening everywhere. It's just the nature of the fire/teacher/police contracts that were given out all over the nation in preceding decades.

So the deciding factor becomes something more like, "How much is the job I'm being offered going to pay me vs the cost of living?" They may also think about personal contacts, and the future opportunities a city is likely to provide them? I'd imagine it doesn't go too much further than that though.

> So for a lot of people, that's probably not being factored very highly because the same thing is happening everywhere.

Not on the same scale everywhere, and certainly not as bad as KY/NJ/CT/IL. If you’re in the 40% to 80% income in those states, and you have 10+ working years left, it would make a measurable distance to move somewhere else where you can save $5k+ per year in taxes, if not more. Even more if you can go remote with a high salary.

I'm not sure why you're getting downvoted. I've lived in Chicago for almost 10 years and this is exactly correct.

I think it's actually a decent time to buy (saying this as I sit in a commercial building I recently purchased in a south suburb). The tax situation can't get much worse, it's almost mathematically impossible to pay all these pensions, it can only get better from here.

Whether or not the "fair tax" passes will be an important bellwether.

>The tax situation can't get much worse, it's almost mathematically impossible to pay all these pensions, it can only get better from here.

What? The tax increases are just starting. This year, Illinois is voting to change from a flat % income tax to having marginal rates. Anyone earning any decent amount of money should expect to pay more and more every year in income tax, property tax, sales taxes, tolls, fees for car registration, basically anything that can help increase tax revenue since expenses aren't going anywhere but up also for the next couple decades. Unless benefit recipients die earlier than expected.

So is California. Around 80-90k of pension liabilities per household.

Just California has Prop 13 protections for land owners.

I live in Chicago. The state has its problems and the city has its problems for sure. However, things are crime rates are definitely exaggerated by people who don’t live here. The amenities of the city in my opinion are through the roof, albeit very much limited right now due to COVID.

The one thing Chicago has that many other cities don’t is space. Chicago is surrounded by land so there’s no lack of supply. My opinion is that’s what keeps prices down.

It's weird that Berlin is not on the list. Hardly any city has seen such a price increase in the last decade.

click looking for SF, disappointed

It was listed in the text and full analysis.

It was interesting to see Zurich classified as more overvalued than San Francisco, but the analysis is not entirely devoid of logic: Zurich has seen fairly active construction, so supply tends to catch up, while San Francisco is a notoriously difficult city to build in.

Deutsche bank is really really in trouble.

https://news.ycombinator.com/item?id=21943167

how is seoul not on that list? anecdotally i've seen the median price nearly double in the last 5 years. gov't is trying all kind of tricks to cool it off.

No one there is moving out of the city due to covid.

I think the study just looked at 25 cities, which means many cities are not included.

Bangkok is also having a huge housing bubble, many believe. Same is likely true for Pattaya & Phuket. Too many empty condos. Not enough buyers. Prices could see huge drops in the near future (and are dropping already). Developers are asking the Thai government now to ease regulation around owning of property by foreigners & ease visa regulation for foreigners [0][1][2][3].

---

[0]: https://forum.thaivisa.com/topic/1189104-property-sector-cal...

[1]: https://www.thaiexaminer.com/thai-news-foreigners/2020/09/16...

[2]: https://www.bangkokpost.com/property/1980939/pattayas-new-co...

[3]: https://www.thaienquirer.com/16236/property-prices-to-fall-d...

dublin not included and it poses the highest risk of collapse

Curious as to the basis of your claim?

Dublin property isn't cheap but as a multiple of disposable income, it's in the lower half of European cities[1] - certainly far below Paris or Amsterdam. I'd imagine property which is more affordable is less likely to collapse in price?

[1] https://www.statista.com/statistics/722946/house-price-index...

* edit - replaced paywalled FT article with a different source

Talking with an Irish colleague, my understanding is that Dublin's so expensive that many Irish people decide to leave the country and work abroad as they can't afford it - Dublin's a hub for multinational companies and only high paid expats working for Google, Apple etc. can afford local prices.

I'm wondering how the post-covid full-remote will affect the market there.

Except for an exceptional period between 2012 and 2015, Ireland has had net inflow of migrants for years.

Even if you focus purely on Irish people emigrating, the numbers are tiny - about 30k a year from a population of nearly 5 million - mostly from outside Dublin. So there's no trace of many people migrating for economic reasons in the statistics.

I will admit that I've more or less given up arguing with my friends who live in Dublin about housing - some sort of mass hysteria has taken hold and normally well-informed people are convinced that Dublin "has the worst property crisis in the world" when all statistics comparing Dublin with other European cities show that buying or renting property there is about average or better in terms of affordability for a European capital.

Toronto

Reply on news.ycombinator.com