When wealth outruns wages: The changing dynamics of global property markets

For years, the connection between home prices and incomes has been clear: what people paid for a house depended primarily on their earnings and borrowing capacity. However, this relationship is becoming more complex. Rising stock markets have increased the spending power of wealthy individuals, while the surge in artificial intelligence (AI) investments has generated significant wealth in tech hubs.

These buyers can afford larger down payments or purchase homes outright, making them less affected by interest rates. Meanwhile, ordinary households continue to struggle with affordability. Even with potential Federal Reserve rate hikes, the global housing market is becoming more diverse. The latest UBS Global Real Estate Bubble Index, now in its twelfth year, examines housing market imbalances across 23 cities worldwide.

It compares home prices to incomes and rents, as well as credit and construction activity. Although bubble risk remains steady globally, disparities exist. Seoul, which saw a 50% surge in bubble risk, exemplifies how financial wealth can influence housing demand. Residential prices rose 50% between 2017 and 2021, fell 20% due to higher interest rates, and have rebounded, with inflation-adjusted prices up 11% in the past year.

Seoul, a major technology and AI center, benefits from wealth generated by investments. Similarly, San Francisco, with its tech employment and equity wealth, maintains certain parts of its housing market despite higher borrowing costs. For property markets, where wealth is generated may matter more than where interest rates are headed.

Zurich and Tokyo lead the UBS index as high-risk cities. Zurich's property prices have increased almost 140% over 20 years, outpacing rent growth of 40% and income growth of 30%. Housing shortages and international talent inflows sustain demand, but valuations are becoming stretched. Tokyo faces similar pressures. Real home prices have risen around 50% over seven years, compared to 4% in real incomes.

Prices have climbed another 6% in the past year, while new apartments in central Tokyo rose by 20%, pushing domestic buyers toward suburban homes. Rising Japanese interest rates have not derailed the market, with demand supported by rising wages (over 4% among younger workers) and foreign buyers. High bubble risk does not guarantee an imminent correction, but the growing disparity between prices and incomes in these cities leaves less room for regret.

London used to top the UBS bubble-risk ranking in 2016, during the Brexit referendum year. Now, it sits in the lower-risk half of the index. After five years of decline, real home prices are more than 15% below their 2021 level. Scarce housing and high rents have not fully compensated for stretched affordability, higher taxes on expensive properties, and wealthy residents leaving.

While sterling weakness and lower prices have attracted international buyers at the top end, the broader market remains cautious. London's experience shows that even severe housing shortages cannot always overcome weak affordability and unfavorable policies. Sydney provides a similar lesson. Real prices fell 4.4% over the past year as borrowing costs reduced affordability.

Housing shortages and immigration remain supportive, but without rate relief, a sustained recovery appears challenging. Closer to home, Hong Kong and Singapore remain in the index's moderate-risk category, despite varying market trends. Hong Kong emerged from a prolonged correction after real house prices fell over 30% between 2018 and 2025 and rebounded 8.7% in the past year.

Lower mortgage rates have boosted new-home sales, while mainland China professionals' inflows support demand. Despite the recovery, Hong Kong's moderate-risk classification suggests current private residential values are not yet reflecting the excesses in other global cities. Singapore has been more stable, with real private residential prices rising around 1% over the past year while rents have been flat.

Local owner-occupiers and upgraders drive demand, as high stamp duties restrain foreign purchases. Prudent measures, such as debt-servicing rules capping monthly debt commitments at 55% of income and banks applying interest-rate buffers when assessing mortgage affordability, along with healthy household balance sheets and controlled housing supply, should help keep private residential prices relatively stable despite higher interest rates.

Interest rates still influence housing markets, though. As investors reprice growth and sticky inflation expectations, US government bond yields have risen sharply. The 10-year Treasury yield has increased around 95 basis points since the year's start to 5.1%, while the two-year yield has climbed about 130 basis points to 4.8%. Long-term inflation expectations remain well anchored, with the 10-year US breakeven inflation near 2.35%, but near-term inflation should keep financing costs elevated.

Housing markets may adjust gradually as fixed-rate mortgages, savings, and cash purchases cushion the impact. However, prolonged challenges could persist.