Zurich has been ranked as one of the three cities most likely to be experiencing a housing bubble, the latest study from UBS has revealed. Alongside sky-high rental costs, the bank noted that buying a house in the Swiss metropolis remains out of reach for around 85 percent of the population.

Which city is most at risk of a housing bubble? 

Every year, UBS analyses the housing market in 25 major cities worldwide, to see which locations are the most at risk of a bubble. The bank defines a housing bubble as a “substantial and sustained mispricing of an asset (in this case housing), the existence of which cannot be proven unless it bursts." 

To estimate each city’s risk, the bank calculated the average cost of buying a house, how much it costs to rent a home, salaries, rates of construction and average prices on the housing market in the country where the city is located. This is then combined into a score, with 1 to 1,5 showing that a city is at an elevated risk of a housing bubble. Any score above 1,5 indicates a city is at serious risk of a housing bubble. 

Housing bubbles develop when home prices become overvalued. When interest rates are low, prospective buyers are encouraged to take larger and more riskier mortgages, which in turn generates demand and encourages sellers to increase prices further. Over time this decouples house prices from rental costs and incomes, eventually developing into an overvalued housing market.

If demand falls and the supply of homes increases gradually, the risk of a bubble declines. However, if house prices and demand fall suddenly and dramatically, the bubble can "burst", after which interest rates on mortgages rise and homeowners often risk foreclosure as they face rising costs and owe more than what their property is worth. This can spiral into a wider economic crisis, most prominently seen in 2008.

Fears of global housing crisis ease

After worsening scores across the board in 2021 and 2022, UBS found that the risk of a global housing bubble has declined in the last two years. While house prices have become increasingly overvalued in the US, this imbalance has declined in both Europe and the Asia Pacific region.

The most profound improvements have been found in Germany: having been ranked as the European city most at risk in 2022, the bubble in Frankfurt has now deflated. The city is now just at moderate risk of an overpriced housing market - home prices have fallen by a fifth since their peak during the pandemic. Other cities like Munich and Amsterdam have also improved, though still have a low to moderate risk of a bubble.

Zurich is the European city most at risk of a housing bubble

Despite no longer occupying the top spot, Zurich was still ranked as the European city with the most overvalued housing. Alongside the top two of Miami and Tokyo, it was one of three cities at “high” risk of a housing bubble.

In the report, UBS noted that in the last five years, house prices in the Swiss metropolis have risen faster than in any other European city, with costs increasing by 20 percent since 2019. Despite the higher cost of Swiss mortgages seen up until recently, house prices have not fallen. 

Housing affordability in Switzerland is bad (but not the worst in the world)

With net incomes only rising by single-digit percentage points, homes in Zurich are increasingly unaffordable. It has been estimated that only 15 percent of Zurich’s population can afford to buy a home today. Buying to rent is also not an effective way to get on the housing ladder, with the report finding that it takes 41 years of rental income from a home in Zurich before it pays itself off.

However, because of the high incomes offered by jobs in Zurich, homes in the city are not the least affordable on Earth. The report found that while it would take a skilled service worker in Zurich an average of eight years’ salary to afford a 60-metre square flat, it would take 22 years in Hong Kong, 13 years in Paris and 12 years in London.

Will the Swiss housing bubble ever burst?

Zurich was also joined in the top 10 by Geneva in sixth place, with the city rated as having an elevated risk of a housing bubble. Home prices in the city have risen by 10 percent in five years, though have stagnated in the last four. This, combined with rising rental costs, has meant that the risk of a bubble in the city has declined.

In all, UBS concluded that thanks to low housing availability, a growing economy and high population growth, the cost of both renting and buying in Zurich and Geneva will continue to rise. Referring to the former, the bank concluded that “due to the very low inventory of owner-occupied homes in Zurich, they will be increasingly perceived as a luxury good and will ultimately gain importance as a status symbol.”

10 cities most at risk of a housing bubble

In all, here are the cities that are most at risk of a housing bubble in 2024:

1. Miami, United States (1,79)
2. Tokyo, Japan (1,67)
3. Zurich, Switzerland (1,51)
4. Los Angeles, United States (1,17)
5. Toronto, Canada (1,03)
6. Geneva, Switzerland (1)
7. Amsterdam, the Netherlands (0,98)
8. Sydney, Australia (0,78)
9. Boston, United States (0,78)
10. Vancouver, Canada (0,77)

For more information, check out the official website.

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