Home » Madrid gets a “moderate” risk score in UBS Bubble Index

Madrid gets a “moderate” risk score in UBS Bubble Index

madrid house price bubble risk
Madrid’s Royal Palace

The Swiss bank’s 2024 report on housing affordability in cities around the world gives the Spanish capital a “moderate” risk of developing a house price bubble, placing it in 16th place out of 25 global cities.

The UBS ‘Global Real Estate Bubble Index’ 2024 report looks at house prices and affordability in 25 of the world’s most important cities, and tries to quantify the risk of house price bubbles developing that might lead to a sharp downward adjustment to bring prices back into line with what residents can afford. 

Central bank policies in the aftermath of the 2008 financial crisis meant that “housing bubble risk reached record highs in many global metropolitan areas,” followed by a reset when interest rates rose with the post-pandemic inflation spike. “Homes in major European cities lost up to a quarter of their value in real terms and imbalances corrected rapidly.”

Now we are looking at another house price boom, warns UBS. “Since the sharp rise in interest rates thwarted the plans of many real estate developers, new construction has nosedived in many cities and looks set to exacerbate the housing shortage, thereby leading to upward price pressure in the future.”

Identifying a property bubble

This is what UBS has to say about spotting a real estate price bubble. 

Price bubbles are a recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. But historical data reveals patterns of property market excesses. Typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity.

The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns. The index does not predict whether and when a correction will set in. A change in macroeconomic momentum, a shift in investor sentiment, or a major supply increase could trigger a decline in house prices.

global house price bubble index overview
Global overview

Madrid’s house price bubble risk

According to the UBS 2024 report:

The bubble risk in Madrid’s housing market has increased compared to last year but is moderate. Although real prices are still 25% below their all-time peak in 2007, the housing market in the Spanish capital has decoupled from the rest of the country over the past few years. Strong household forma- tion and investment demand intensified the housing shortage. Real rents increased by 15% over the last four quarters. Hence, home prices increased by 5% between mid-2023 and mid-2024, despite unfavourable financing conditions.

Key charts from the report with Madrid highlighted

Around the world

Here’s a summary of what the report has to say about the global picture.

  • Housing affordability remains a significant challenge in many major cities with a continued disconnect between housing prices and average worker salaries, making homeownership a distant dream for many. Cities like Tokyo, Paris, and London require over 10 years of a worker’s full salary to purchase a 60m2 flat in the city centre. This is attributed to factors like strong foreign investment, stringent urban planning controls, and strict rental market regulations. “Although housing prices have decreased slightly in the cities analysed and income growth has been relatively stable in recent quarters, affordability is still limited in many places”
  • Cities like Madrid, San Francisco, Miami, and Stockholm offer relatively better affordability, with residents needing approximately 5 years of full salary to purchase a similar flat in the city centre. These cities benefit from stable salaries and relatively moderate housing prices.
  • Rental yields have improved due to rising rents outpacing housing price increases. However, profitability remains a long-term game, with cities like Zurich, Munich, Tel Aviv, Geneva, and Hong Kong requiring over 30 years to recoup the investment through rental income.
  • Dubai and Miami, despite facing high bubble risks, offer the fastest return on investment through renting, with a payback period of 15 years. São Paulo, San Francisco, and Madrid follow closely with payback periods under 20 years. The report attributes this to less regulated rental markets and higher-than-average interest rates.
  • The rise in interest rates and mortgage obligations has had a significant impact on affordability. Even in cities with better price-to-income ratios, such as in the USA, high-interest rates and amortisation requirements can strain affordability. Conversely, high purchase prices can be sustained with low-interest rates and relaxed amortisation requirements, as seen in Switzerland and the Netherlands.

You can download the full report from the UBS website here.