Toronto's housing market has the greatest bubble risk in the world

Oct 13 2022, 4:35 pm

Toronto’s housing market has a greater bubble risk than any other city in the world.

The city’s “highly elevated” risk was revealed in the newly released UBS Global Real Estate Bubble Index 2022.

Cities that place between 0.5 and 1.5 on the Index are overvalued, while anything over 1.5 represents a bubble risk. Toronto scored a 2.24.

Frankfurt, Germany, ranked second with a score of 2.24, followed by Zurich, Switzerland’s 1.81. Vancouver, the only other Canadian city included on the Index, came in at number six with a score of 1.70.

Toronto housing bubble

UBS

A real estate bubble occurs when home prices rise at a rapid rate due to an increase in demand amid limited supply.

The UBS Global Real Estate Bubble Index does not predict whether a housing market correction will set in but does gauge the risk of a bubble.

According to UBS, signs of a bubble typically include a disconnect between home prices and local incomes and rents, as well as imbalances in the economy such as excessive lending and construction activity.

Toronto is exhibiting “pronounced bubble characteristics,” the report warns.

Toronto’s bubble risk has increased in recent years; the city placed second on the 2021 iteration of the index, with a score of 2.02, and third in 2020 with a 1.96.

“An urban housing shortage amid strong population growth and falling mortgage rates are typically seen as the two main culprits of the long-term property bonanza,” the report reads.

“The index has been flashing warning signals in the last couple of years.”

Declining mortgage rates in 2019 kicked off a housing market frenzy that continued into 2021, the report said. Home prices in Toronto are now 17% higher than a year ago, and price growth has accelerated to its highest rate in five years.

With affordability already stretched, the Bank of Canada’s recent interest rate hikes could be the “last straw that broke the camel’s back.”

“New buyers and owners during mortgage renegotiations not only need to pay higher interest rates but are also required to provide more income to qualify for a mortgage,” the report reads. “Price correction is already in the making.”

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