Amsterdam officially dealing with a housing market bubble

A cloudy day in Amsterdam
A cloudy day in AmsterdamPhoto: alxbaev/DepositPhotos

Amsterdam is officially dealing with a bubble on the housing market, according to Swiss bank UBS. Amsterdam is tied with Hong Kong for the third most likely city to be experiencing a housing market bubble. Only Munich and Toronto were deemed at greater risk, UBS said in the report released on Monday.

UBS defines a bubble as "a substantial and sustained mispricing of an asset, the existence of which cannot be proven unless it bursts."

"Amsterdam has recorded the strongest price increase of all cities in the study since 2015. On average, real prices have increased by close to 10% a year, outpacing income growth by far," wrote the bank. A "strong regional economy" and "rapidly easing financing conditions amid a wave of speculative purchases" has contributed to the issue in Amsterdam, allowing investors to borrow more cash at a lower long-term cost. They are increasingly snatching up homes in Amsterdam to rent out at high monthly rates.

"Last year, price growth has slowed and fallen below the national average for the first time since 2008," the bank said.

One big problem with that is that a housing market in the hands of professionals behaves differently than one in the hands of workers with a mortgage, according to newspaper NRC. If the housing market collapses and rents begin to fall, a landlord will have to lower the rent in order to find a tenant. But a property is valued based on the rental price, which means if an investor accepts a lower rent, they will have to write down the property value in the books. Either that or keep rental value high while maintaining an empty home with no tenant.

That is called professional vacancy, something that is already common in the office market, which has been in the hands of investors for some time. 

UBS warns that "if there is an economic recession, a correction is very likely" on the Amsterdam market. In all world cities, housing prices are no longer rising. Which means that Amsterdam and its housing shortage may soon sit with increasing vacancy if investors refuse to take a loss. 

The bank also identified Munich, Vancouver, and Paris as being a bubble risk. Of the 24 cities examined globally, Chicago was the only one deemed "undervalued," with Singapore, Boston, Milan and Dubai considered "fair valued."