Canada's red-hot housing hubs are fundamentally unstable

A newly released analysis by Swiss multinational investment bank UBS identified Toronto and Vancouver – along with 4 other major urban areas elsewhere in the world – as fundamentally unstable housing bubbles that might significantly pull their respective national economies downward in the near future.

In the annual study that looked at salaries, home and rental prices, mortgage debt, and several other elements, the bank scored Toronto a 1.95 and Vancouver a 1.92.

The UBS metric considers any housing market scored above 1.5 as extremely overvalued and already deep into bubble territory.

A price analysis released by The Economist in mid-August had a similar conclusion, finding that Canadian real estate is valued 56% higher than it should be.

This placed Canada as the 3rd most overvalued nation globally in terms of housing values, just behind New Zealand and Australia.

Read more: Housing misery is the Canadian young adult’s lot – study

Residential properties in Toronto and Vancouver are becoming increasingly out of reach of the average Canadian. The UBS study determined that workers in the median salary range in Toronto would need more than 6 years’ worth of earnings to buy a house at the average price point, and 25 years of rental activity to make up for the cost of an investment property.

Meanwhile, Vancouver’s median earners would need 9 and 34 years respectively to justify their purchases.

“Investors anticipate being compensated with capital gains for overly low rental yields,” UBS said, as quoted by CBC News. “If such hopes do not materialize and expectations deteriorate, homeowners in markets with high price-to-rent multiples are likely to suffer significant capital losses.”