Home prices in Los Angeles may be about to fall, according to a new analysis from investment banker UBS.
While demand for LA real estate is expected to remain strong, especially after interest rates were cut earlier this month, UBS said the situation is more complicated than it seems.
In their thorough report, the banking giant found that Los Angeles had the fourth highest risk of entering a housing bubble among 25 major international cities.
And if that bubble were to burst, homebuyers and real estate buyers could snag a bargain in the sunny coastal city, where the average home costs nearly $1 million.
Surveying house prices over the past year, UBS found that the risk of a bubble for the city had increased since their previous report in 2023.
Home prices in Los Angeles may be about to fall, according to a new analysis from investment banker UBS
While demand for LA real estate is expected to remain strong, especially after interest rates were cut earlier this month, UBS said the situation is more complicated than it seems.
In their thorough report, the banking giant found that Los Angeles had the fourth highest risk of entering a housing bubble among 25 major international cities.
The analysis found that there was a high ratio between the cost of owning a home in Los Angeles and the cost of renting one.
The city has also suffered a population decline over the past decade.
According to UBS, San Francisco has a brighter outlook.
After the interest rate increase in 2022, house prices in the city responded adequately, with a correction of about 10 percent.
This caused the real estate market in San Francisco to cool.
Surveying house prices over the past year, UBS found that the risk of a bubble for the city had increased since their previous report in 2023.
The analysis found that there was a high ratio between the cost of owning a home in Los Angeles and the cost of renting it
The city has also suffered a population decline over the past decade. The famous Griffith Observatory is pictured
But the recent rate cut, coupled with a resilient stock market, indicates that demand for real estate in the city could recover quickly.
In a statement to SFGATEJonathan Woloshin, a real estate and lodging analyst at UBS, compared the different outcomes for the two California cities.
“Los Angeles has a higher price-to-income score and a significantly higher price-to-rent score compared to San Francisco,” Woloshin wrote.
“Additionally, real (inflation-adjusted) home prices in Los Angeles have been significantly higher than those in San Francisco over the past five years,” he continued.
“Los Angeles has a higher price-to-income score and a significantly higher price-to-rent score compared to San Francisco,” wrote Jonathan Woloshin, a UBS analyst.
“Additionally, real (inflation-adjusted) home prices in Los Angeles have been significantly higher than those in San Francisco over the past five years,” Woloshin further noted.
Woloshin said these two factors “are the main contributors to the difference in risk score between LA and SF.”
According to UBS, Miami was the city most at risk of a housing bubble, a product of the city’s red-hot luxury real estate market.
Tokyo and Zurich were in second and third place respectively. Since 2023, the risk of a bubble in Tokyo has increased. Zurich’s has decreased.
While bubbles indicate a housing market is overvalued, there is no guarantee they will necessarily burst in the future, the report said.
Although bubbles indicate that a housing market is overvalued, there is no guarantee that they will necessarily burst in the future, according to UBS
According to UBS, San Francisco has a brighter outlook: the city’s real estate market is expected to recover
Given the recent drop in interest rates, Matthias Holzhey, author of the UBS study, concluded that the housing market is on the verge of recovery.
He believes this recovery will be fueled by new homebuyers returning to the market, reducing the risk of bubbles.
“Real house prices in many cities have bottomed out,” Holzhey said SFGATE in a statement.
“The economic outlook will likely determine whether prices rise again or go sideways.”