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Real Estate Bubbles: The Six Cities at Risk of Bursting

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What do Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong all have in common?

According to economists at UBS Wealth Management, these six cities all have the notorious designation of being the real estate markets furthest into “bubble” territory:

Real Estate Bubbles

The major Swiss bank recently published the results of their 2016 Real Estate Bubble Index. The report found that since 2011, the six cities in “bubble” territory have seen housing prices soar at least 50% on average. Meanwhile, in other comparable markets, the average increase in prices was less than 15% over the same timeframe.

At the top of the list, not surprisingly, sits Vancouver – a city that has been grappling with real estate mania for some time.

Here’s Vancouver’s rise, compared with other select markets in North America.

North American Cities

Note that San Francisco is in the “overvalued” zone, but getting close to an official bubble designation.

A Delicate Balance

Why are these housing markets so overvalued?

It comes down to three main drivers, according to UBS: a flood of foreign capital, loose monetary policy, and bullish expectations from buyers.

Flood of foreign capital: Wealthy Chinese people are leaving the country in droves, and they are looking at places to park their capital. Cities like Vancouver and Sydney make sense because of their proximity. Cities such as London or New York, on the other hand, may appeal because they are global financial centers.

Loose monetary policy: Low interest rates, some which are zero or even negative, work to artificially inflate asset prices. Lenders can get mortgages for rock-bottom rates, and systematically bid up the price of real estate. We are currently undergoing one of the biggest financial experiments of all time, as central banks have run out of levers to pull. Rates are near zero and there has already been unprecedented amounts of liquidity pumped into the system through quantitative easing.

Bullish expectations: At the end of the day, people will continue to bid up real estate bubbles if they think they will profit from it. This is human nature, and it will take a shift in overall market sentiment to hinder this.

From our perspective, the most interesting and concerning aspect is the loose monetary policy found worldwide. If central banks raise rates right now, markets will crash.

If they continue to postpone due to weak economic data, the housing bubbles will continue to inflate. The more they inflate, the more sensitive they are to any trigger that could pop them.

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Will Tesla Lose Its Spot in the Magnificent Seven?

We visualize the recent performance of the Magnificent Seven stocks, uncovering a clear divergence between the group’s top and bottom names.

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Will Tesla Lose Its Spot in the Magnificent Seven?

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

In this graphic, we visualize the year-to-date (YTD) performance of the “Magnificent Seven”, a leading group of U.S. tech stocks that gained prominence in 2023 as the replacement of FAANG stocks.

All figures are as of March 12, 2024, and are listed in the table below.

RankCompanyYTD Change (%)
1Nvidia90.8
2Meta44.3
3Amazon16.9
4Microsoft12
5Google0.2
6Apple-6.7
7Tesla-28.5

From these numbers, we can see a clear divergence in performance across the group.

Nvidia and Meta Lead

Nvidia is the main hero of this show, setting new all-time highs seemingly every week. The chipmaker is currently the world’s third most valuable company, with a valuation of around $2.2 trillion. This puts it very close to Apple, which is currently valued at $2.7 trillion.

The second best performer of the Magnificent Seven has been Meta, which recently re-entered the trillion dollar club after falling out of favor in 2022. The company saw a massive one-day gain of $197 billion on Feb 2, 2024.

Apple and Tesla in the Red

Tesla has lost over a quarter of its value YTD as EV hype continues to fizzle out. Other pure play EV stocks like Rivian and Lucid are also down significantly in 2024.

Meanwhile, Apple shares have struggled due to weakening demand for its products in China, as well as the company’s lack of progress in the artificial intelligence (AI) space.

Investors may have also been disappointed to hear that Apple’s electric car project, which started a decade ago, has been scrapped.

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