The most expensive city in Canada is now also the world’s riskiest city for a sudden downward correction in housing prices, according to UBS.
The Swiss bank released its latest Global Real Estate Bubble Index today which found that Vancouver had the greatest risk based on the rapid and steep increase in the average housing prices against economic factors such as the rise in average wages, rents, lending patterns, and construction activity.
“The risk of a substantial price correction appears very elevated,” concludes the report on the state of Vancouver’s housing market.
Housing prices in Vancouver continued to climb during the 2008 financial crisis and even as commodity prices weakened, which have been offset by loose credit conditions. It found that there has been a “significant overvaluation” in the Vancouver real estate market since 2007.
Since the last quarter of 2014 when the value of the Canadian dollar began to weaken, real estate prices in the city have climbed by over 25%, prompting more demand from foreign investors from Asia.
“Over the last two years, the housing market has gone into overdrive due to strong demand for local properties among foreign investors and a loose monetary policy,” reads the report. “Currently, house prices in Vancouver seem clearly out of step with economic fundamentals, and are in bubble risk territory.”
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The real estate market in 18 global cities were evaluated in the report, which is based on data running up until the second quarter of 2016 – before the implementation of the BC provincial government’s 15% property transfer tax on foreign buyers.
Analysts say Vancouver’s real estate market began slowing down before the implementation of the foreign buyers tax. Home sales fell by 22.8% in July compared to the same period last year, and the trend continued the following month with a 26% drop.
New figures released last week by the provincial government also show that home sales to foreign buyers fell from 13.2% between June 10 and August 1 to just 0.9% between August 2 and August 31, after the tax went into effect. Foreign buyers are now shifting their interest from Vancouver to Toronto, now Canada’s most active real estate market, and neighbouring Seattle.
Five other cities have also been deemed by UBS of being a bubble risk: Vancouver is followed by London, Stockholm, Sydney, Munich, and Hong Kong. Cities that are overvalued, short of being in a bubble, are San Francisco, Amsterdam, Zurich, Paris, Geneva, Tokyo, and Frankfurt.
Singapore, Boston, and New York are identified as fair-valued housing markets while Milan and Chicago are undervalued.