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These Global Cities Show the Highest Real Estate Bubble Risk

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World map showing which cities show the greatest real estate bubble risk

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These Global Cities Show the Highest Real Estate Bubble Risk

Housing bubbles are a tricky phenomenon. As a market gathers steam and prices increase, it remains a matter of debate whether that market is overvalued and flooded with speculation, or it’s simply experiencing robust demand.

Of course, once a bubble bursts, it’s all obvious in hindsight.

One common red flag is when prices decouple from local incomes and rents. As well, imbalances in the real economy, such as excessive construction activity and lending can signal a bubble in the making.

The map above, based on data from the Real Estate Bubble Index by UBS, examines 25 global cities, scoring them based on their bubble risk.

Overinflated Markets

In the 2022 edition of the Real Estate Bubble Index, nine of the cities covered were classified as having extreme bubble risk (1.5 or higher score).

RankRisk CategoryCityBubble Index Score
#1🔴🇨🇦 Toronto2.24
#2🔴🇩🇪 Frankfurt2.21
#3🔴🇨🇭 Zurich1.81
#4🔴🇩🇪 Munich1.80
#5🔴🇭🇰 Hong Kong1.71
#6🔴🇨🇦 Vancouver1.70
#7🔴🇳🇱 Amsterdam1.62
#8🔴🇮🇱 Tel Aviv1.59
#9🔴🇯🇵 Tokyo1.56
#10🟠🇺🇸 Miami1.39
#11🟠🇺🇸 Los Angeles1.31
#12🟠🇸🇪 Stockholm1.22
#13🟠🇫🇷 Paris1.21
#14🟠🇦🇺 Sydney1.19
#15🟠🇨🇭 Geneva1.14
#16🟠🇬🇧 London1.08
#17🟠🇺🇸 San Francisco0.78
#18🟠🇺🇸 Boston0.75
#19🟠🇪🇸 Madrid0.59
#20🟠🇺🇸 New York0.57
#21🟠🇸🇬 Singapore0.50
#22🟢🇮🇹 Milan0.34
#23🟢🇧🇷 Sao Paulo0.20
#24🟢🇦🇪 Dubai0.16
#25🟢🇵🇱 Warsaw0.15

Canada’s largest city finds itself at the top of a ranking no city wants to end up on. Toronto’s home prices have been rising steadily for years now, and many, including UBS, believe that the city is now firmly in bubble territory.

Chart showing Toronto's rising home prices

Vancouver also finds itself in a similar position. Both Canadian cities have a high quality of life and have thriving tech industries.

Notably, none of the U.S. cities analyzed find themselves in the most extreme bubble risk category. The closest scoring U.S. city was Miami, which sits firmly in overvalued territory (0.5-1.5 range) with a score of 1.39.

Examining the Trends

In recent years, low interest rates helped push home prices and incomes further apart.

For cities in the bubble risk zone, prices have climbed by an average of 60% in inflation-adjusted terms over the past decade, while rents and real incomes increased by just 12%. And, while COVID-19 briefly put a dent in urban demand, rents in the cities analyzed rose at around the same pace as pre-pandemic times.

As a result, all but three of the cities saw positive price growth over the past year from a nominal price perspective:

Chart showing real estate price growth rates in global cities in 2021

U.S. cities occupy a number of spots at the top of this chart. Miami, in particular, is seeing strong internal migration patterns, as well as renewed interest from foreign investors.

Hong Kong experienced the biggest one-year nominal drop of all the cities analyzed. The report notes that since around 2019 Hong Kong “has broadly stagnated as the lack of affordability, economic woes, and pandemic restrictions all took a major toll on demand.”

Prices can’t rise forever. According to UBS, most cities with high valuations, price corrections have already begun, or could be right around the corner.

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Markets

Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?

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A line chart showing the historical return performance of small-, mid-, and large-cap stocks.

 

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The following content is sponsored by New York Life Investments
An infographic comparing low-, mid-, and large-cap stocks, including an area graph showing historical returns, a bubble chart showing how much $100 would be worth over 35 years, a horizontal bar graph showing annualized volatility, and a line graph showing relative forward price-to-earnings ratios, that together show that mid-cap stocks present a compelling investment opportunity.

Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.

According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps.  

This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.

Higher Historical Returns

If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?

Small CapsMid CapsLarge Caps
Starting value (February 1989)$100$100$100
Ending value (February 2024)$2,162$3,276$1,764

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.

This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.

Small caps also outperformed over this timeframe. They earned 23% more than large caps. 

Higher Volatility

However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps. 

Small CapsMid CapsLarge Caps
Total Volatility18.9%17.4%14.8%

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.

Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.

Attractive Valuations

Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.

Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point. 

Small Caps/Large CapsMid Caps/Large Caps
Relative Forward P/E Ratios0.710.75
Discount29%25%

Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.

Discovering Small- and Mid-Cap Stocks

Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.

With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.

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