The weight of money that has pressed on many of the 12 world cities since quantitative easing took hold in 2009 has led economists and politicians to ask whether real estate bubbles have been created. Large numbers of residents in these cities have also become concerned, so political pressure is growing to curb what is seen by many to be a problem. But are the markets really as overheated as some commentators suggest?
Our analysis indicates that many concerns for the mainstream residential markets, in particular, are overdone and, although some of our world cities may look very expensive in relation to the countries in which they sit, this is not indicative that all of the markets are overheated.
Do rents reveal value?
In our last world city analysis, we started to look at this issue by examining the cities where residential rental growth was not keeping pace with capital growth. We assessed whether the resulting low yields looked sustainable by reference to the prevailing rate on government bonds.
We have updated this analysis again as we think it is a revealing measure of fundamental value (see fig. 7). But this time we have looked across the board at rents paid in commercial markets as well as residential (see fig. 8).
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