Los Angeles home prices could be about to fall, according to a new analysis by investment banking firm UBS.
Although demand for properties in Los Angeles is expected to remain high, especially after interest rates were cut earlier this month, UBS said the situation is more complicated than it seems.
In its exhaustive report, the banking giant determined that among the top 25 international cities, Los Angeles had the fourth highest risk of being in a housing bubble.
And if that bubble were to burst, home and property buyers could find themselves grabbing a bargain in the sunny coastal city, where the average home costs almost $1 million.
Examining residential property prices over the past year, UBS found that the risk of a bubble in the city had increased since its previous 2023 report.
Home prices in Los Angeles could be about to fall, according to a new analysis by investment banking firm UBS
Although demand for properties in Los Angeles is expected to remain high, especially after interest rates were cut earlier this month, UBS said the situation is more complicated than it seems.
In its exhaustive report, the banking giant determined that among the top 25 international cities, Los Angeles had the fourth highest risk of being in a housing bubble.
The analysis showed 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 seen a decline in its population over the past decade.
According to UBS, San Francisco enjoys more promising prospects.
Following the increase in interest rates in 2022, housing prices in the city responded adequately, correcting around 10 percent.
This caused the San Francisco real estate market to cool down.
Examining residential property prices over the past year, UBS found that the risk of a bubble in the city had increased since its previous report in 2023.
The analysis showed 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 seen a decline in its population over the past decade. Pictured is the famous Griffith Observatory.
But the recent cut in interest rates, along with a resilient stock market, indicate that real estate demand in the city could soon recover.
In a statement to SF gateJonathan Woloshin, a real estate and lodging analyst at UBS, compared the different results for the two California cities.
“Los Angeles has a higher price-to-income ratio and a significantly higher price-to-rent ratio compared to San Francisco,” Woloshin wrote.
“In addition, over the past five years real (inflation-adjusted) home prices in Los Angeles have significantly exceeded those in San Francisco,” he continued.
“Los Angeles has a higher price-to-income ratio and a significantly higher price-to-rent ratio compared to San Francisco,” wrote UBS analyst Jonathan Woloshin.
“In addition, over the past five years real (inflation-adjusted) home prices in Los Angeles have significantly exceeded those in San Francisco,” Woloshin noted.
Woloshin said these two factors “are the main contributors to the differential in risk score between LA and SF.”
According to UBS, the city that suffered the greatest risk of a real estate bubble was Miami, a product of the city’s red-hot luxury real estate market.
In the number two and three positions were Tokyo and Zurich, respectively. Since 2023, the risk of a bubble in Tokyo has increased. Zurich’s has decreased.
Although bubbles suggest that the housing market is overvalued, there is no guarantee that they will necessarily burst in the future, the report notes.
According to UBS, although bubbles suggest that the housing market is overvalued, there is no guarantee that they will necessarily burst in the future.
According to UBS, San Francisco enjoys brighter prospects: 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 real estate market is about to recover.
He believes this recovery will be driven by first-time homebuyers returning to the market, reducing the risk of bubbles.
“Real housing prices in many cities have hit rock bottom,” Holzhey told SF gate in a statement.
“The economic outlook will likely determine whether prices will rise again or rather remain sideways.”