Toronto and Vancouver rank among the top cities worldwide for overvalued property markets facing the risk of a housing bubble, a UBS study says.
Hong Kong, Munich, Toronto, Vancouver and Amsterdam face the greatest risk of seeing their property values collapse, the UBS Global Real Estate Index says.
The study notes the term bubble “refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” An index score of 1.5 or greater indicates a bubble. Toronto has a score of 1.95 while Vancouver scores 1.92. Hong Kong has a score of 2.03.
Despite the high index score, house prices in Toronto have stabilized over the last year, the study says. Still, prices are 50% higher than five years ago when adjusted for inflation. It would take six years of income for a “skilled service worker” to buy a 650-square-foot apartment near downtown Toronto.
The index score for the city dropped slightly over the last four quarters. Taxes on foreign buyers, vacant houses and expansion of rent controls in Ontario likely contributed to a cooling in prices, the study says. It forecasts that a short-term decline in the Canadian dollar could attract foreign buyers again to Toronto.
Prices in Vancouver, however, rose by more than 10% last year and the city has “a ballooning index score,” the study says. Real prices have doubled in 12 years.
Higher taxes on foreign investors didn’t stop the rise in prices, the report says. A skilled service worker would need nine years of their salary to buy a 650-square-foot-apartment near downtown Vancouver.
Overall for Toronto and Vancouver, tighter mortgage lending rules, rising interest rates or an economic downturn “could turn the lights out on the party given the high valuations and strained affordability,” the study says.
Read the study here.