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The World’s Biggest Real Estate Bubbles in 2018

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Note: Cities with a “Bubble Risk” (>1.5) are shown in red

The World's Biggest Real Estate Bubbles in 2018

Courtesy: UBS

The World’s Biggest Real Estate Bubbles in 2018

With the current stock market bull run reaching nearly 10 years in length, it’s understandable that many investors are nervous about the end of the party coming sooner than later.

However, as UBS notes in its latest report, there is also growing concern about another prominent bubble that’s been in the works since the aftermath of the financial crisis.

Large amounts of easy money have fueled real estate bubbles in the world’s major cities – and the Swiss investment bank now sees the property markets in six global cities as being at risk.

The Bubble Index

In the 2018 edition of the bank’s Real Estate Bubble Index, here are the major cities around the globe that are in or near bubble territory:

The biggest real estate bubbles

Any city with a score over 1.5 is considered at “Bubble Risk”, and right now those include two cities from Canada, one from Asia, and three from Europe.

Hong Kong (2.03) tops the index this year, leaping past Munich (1.99), Toronto (1.95), and Vancouver (1.92) which all remain at bubble risk themselves. Amsterdam and London are the two other cities that score higher than a 1.5 on the rankings.

It’s also very important to note that there are four cities that score just under the 1.5 threshold: Stockholm (1.45), Paris (1.44), San Francisco (1.44), and Frankfurt (1.43).

A Coming Correction?

Investor and writer Howard Marks has noted in recent months that the wider market is in its “8th inning”, and the same case could be made for real estate.

Historically, investors have had to be alert to rising interest rates, which have served as the main trigger of corrections.

– UBS Report

According to UBS, the cracks are already starting to show at the top end of the market, with housing prices declining in half of last year’s list of bubble cities. Some of the worrying factors include rising interest rates, as well as growing political tensions as the crisis of affordability makes it harder for average people to live in these global financial centers.

Here is annualized growth in percent over the last year, as well for the last five years for cities in the index:

Real estate bubbles and their growth rates

As you can see, some of these cities have had negative growth over the last 12 months, including New York, Toronto, Sydney, London, and Stockholm.

Charting Specific Markets

In Hong Kong, you need to work 22 years to afford a 645 sq. ft (60m²) apartment, when that took just 12 years just a decade ago. In recent years, Hong Kong’s ascent to becoming one of the biggest real estate bubbles has become very evident, especially when juxtaposed with Singapore:

Hong Kong

In Canada, the two cities in the index are starting to go in alternate directions, although recent signs also point to a potential slowdown in Vancouver:

Vancouver and Toronto

Finally, the U.S. market – which felt the pain of the housing crash in the late 2000s – is home to zero cities in the bubble risk category, according to UBS.

American cities

Whether it is a bubble or not, many people agree that San Francisco’s housing situation is still a crisis. In the Bay Area hub, 60% of all rental units are in rental-controlled buildings, and the median single-family house price is a hefty $1.7 million.

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Technology

Just 20 Stocks Have Driven S&P 500 Returns So Far in 2023

From Apple to NVIDIA, megacap stocks are fueling S&P 500 returns. The majority of these firms are also investing heavily in AI.

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Just 20 Stocks Have Driven Most of S&P 500 Returns

Just 20 firms—mainly AI-related stocks—are propping up the S&P 500 and driving it into positive territory, signaling growing risk in the market.

The above graphic from Truman Du shows which stocks are making up the vast majority of S&P 500 returns amid AI market euphoria and broader market headwinds.

Big Tech Stock Rally

Tech and AI stocks have soared as ChatGPT became a household name in 2023.

The below table shows data from last month, highlighting that just a small collection of companies drove most of the action on the U.S. benchmark index.

Company RankNameContribution to S&P 500 ReturnAverage Weight
1Apple1.49%6.61%
2Microsoft1.15%5.72%
3NVIDIA 1.00%1.62%
4Meta0.66%1.15%
5Amazon0.51%2.56%
6Tesla0.50%1.39%
7Alphabet (Class A Shares)0.34%1.72%
8Alphabet (Class C Shares)0.31%1.53%
9Salesforce0.19%0.51%
10Advanced Micro Devices0.16%0.39%
11General Electric0.10%0.28%
12Visa0.10%1.08%
13Broadcom0.09%0.73%
14Intel0.09%0.35%
15Walt Disney0.08%0.55%
16Booking Holdings0.07%0.28%
17Exxon Mobil0.06%1.37%
18Netflix0.06%0.44%
19Oracle0.06%0.40%
20Adobe0.06%0.49%
Top 20 Companies7.05%29.17%
S&P 500*7.55%100.00%

*Based on the Vanguard S&P 500 ETF as of April 11, 2023. Source: Vanguard S&P500 ETF, Bloomberg.

Microsoft invested $10 billion into OpenAI, the creators of ChatGPT. It has also integrated generative AI into its search engine Bing. This large language model is designed specifically to make search capabilities faster, generate text, and perform other automations.

Also of interest is NVIDIA, which is the most valuable chipmaker in America. It sells $10,000 chips called A100s that allow machine learning models to run. These models perform multiple tasks simultaneously to develop neural networks and train AI systems, including OpenAI’s ChatGPT. Companies that are developing AI-related services, such as chatbots or image generation, may use up to thousands of these chips.

Despite being the world’s most valuable company and a key driver of returns, Apple is an outlier among tech giants with no major projects announced in AI (so far).

Implications of Market Divergence

The problem with the strong gains seen in a few select AI-related stocks is that it clouds wider stock market performance.

Without the AI-led rally, the S&P 500 would be returning -1.4%. as of May 17, 2023.

This form of steep divergence, known as market breadth, often signals higher risk in the market.

When more companies experience positive returns it is less risky than a small handful seeing the majority of the gains. Today market breadth is very narrow, and these companies make up over 29% of the entire index’s market capitalization.

How long AI-related firms mask the broader performance of the S&P 500 remains to be seen. A growing number of market pressures, from higher interest rates to banking uncertainty could add further challenges.

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