UBS Global Real Estate Bubble Index ranks Toronto's risk as extremely high, but price growth has stalled and further housing market weakening is likely
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The real estate bubble risk in Toronto is the second-highest in the world, according to data from the UBS Global Real Estate Bubble Index 2019. Canada’s largest city has a risk of 1.86, which is second only to Munich, which has a risk of 2.01. Amsterdam and Hong Kong tie for third place with a risk of 1.84.
Vancouver still poses a threat with a risk of 1.61, although that is a modest drop from its assessment of 1.92 in 2018. Toronto also experienced a slight drop from its 2018 risk of 1.95, and even more from its 2017 bubble risk of 2.12.
The UBS Global Real Estate Bubble Index gauges the risk of a property bubble—defined here as the substantial and sustained mispricing of an asset—on the basis of patterns of property market excesses. Signs typically include a “decoupling” of prices from local incomes and rents and imbalances in the real economy, such as excessive lending and construction activity.
“Low affordability already poses one of the biggest risks to property values in urban centers. If employees cannot afford an apartment with reasonable access to the local job market, the attractiveness and growth prospects of the city in question drop,” write Head of Swiss & Global Real Estate Claudio Saputelli and Head of Swiss Real Estate Investments Matthias Holzhey in the report.
These drops are often followed by attempts to curb price appreciation through regulatory measures, what have served to correct the market in the most overheated cities in recent years. In fact, real prices in the top four ranking cities in the 2016 UBS Global Real Estate Bubble Risk Index have fallen on average by 10%.
Between 2000 and 2018 real home prices in the Canadian cities in the UBS Index (Vancouver and Toronto) rose consistently by more than 5% each year. But, the report reads, over the last four quarters, price growth has stalled.
“The introduction of taxes on foreign buyers, vacancy fees and stricter rent controls seem to have taken effect. While the average price level in Toronto has remained broadly unchanged from last year, prices in Vancouver are down by 7%,” the report reads. “Lower mortgage rates are supportive, but cannot outweigh lower economic growth.”
In other words, while homes are still overvalued, the housing frenzy seems to have come to a halt—for now.
In Toronto, home prices almost tripled between 2000 and 2017, and although measures have been put in place to address affordability, a major price correction seems unlikely in the near future due to factors such as a weakening Canadian dollar and low housing supply. In Vancouver, the growth rates have reversed from higher than 10% to -7% in just two quarters, and the market remains vulnerable to the slightest shift in demand. Regional housing supply in Vancouver is increasing, although prices are 75% higher than they were 10 years ago.
In both cities, the report states that favourable financing conditions are keeping home prices high, although affordability remains a key risk.
There are, however, several differences between today’s bubbles and those that destroyed the American housing market more than a decade ago, dragging parts of the world down with it. Currently, lending growth is on par with GDP growth, which is in contrast to the run-up to the Great Financial Crisis, when outstanding mortgage volumes increased up to 2.5% faster than GDP, according to the UBS report.
Toronto and Vancouver are the only cities in North America that have a high risk of having real estate bubbles; with the exception of Hong Kong, all other high-risk cities are in the Eurozone.
