The extremely low interest rates pose a greater risk of a bubble in the Eurozone real estate markets.
Munich is most vulnerable to a bubble, and Paris and Frankfurt have entered the risk zone for the first time, UBS said in its annual global bulletin housing bubble index report. In fact, the index values rose in all Eurozone UBS rated cities.
The European Central Bank further lowered its key interest rate this month.
"The expected slowdown in the economy – especially in Germany – will test the current price level," said UBS. The German economy shrank in the second quarter and many forecasters expect the same in the third quarter.
Affordability issues, political uncertainties and unfavorable tax treatment are putting housing prices in London under pressure, UBS said as the British capital pulled out. In contrast, none of the US cities rose – New York, Boston, Chicago, San Francisco and Los Angeles – in bubble index, which was the first time since 2011. UBS says Chicago is undervalued. However, the increasing fiscal challenges left him far behind.
The UBS index is a weighted average of price-income ratio, rental price, mortgage-to-GDP ratio, construction-to-GDP ratio and relative price-to-country indicators.