Swiss bank UBS says Toronto has 3rd largest real estate bubble in the world

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A Swiss bank has concluded that Toronto’s housing market is in bubble territory as homes in the city are more overvalued than in places like New York City, San Francisco, London and Hong Kong.In an annual ranking, UBS examines 25 major cities in Europe, North America, the Middle East and Asia to track and compare the risk of real estate bubbles locally in each of them, then assigns them a number based on that ranking.

A score above 1.5 indicates that the bank believes there is a risk of a bubble, which UBS defines as “a substantial and lasting mispricing of an asset, the existence of which can only be proven if ‘it bursts’.

A score between 0.5 and 1.5 suggests that the market is simply overvalued, while a score below 0.5 at -0.5 suggests fair value. Anything below that implies the city is undervalued based on local income, housing demand, and other factors.

Toronto scored 1.96, which placed it behind just the German cities of Munich at 2.35 and Frankfurt at 2.26.

No other North American city has been considered bubble territory, including Vancouver, New York, Los Angeles, Boston, Chicago, or San Francisco.

This is the third year in a row that Toronto has been considered to be in a bubble, having scored 1.95 in 2018 and 1.86 in 2019.

Vancouver is rated 1.37, which means UBS believes the city’s real estate is only slightly overvalued. Vancouver was also in bubble territory two years ago, scoring 1.92. But prices have fallen in the two years between that report and the advent of COVID-19.

But the pandemic has had an unexpected impact on the Canadian real estate market. House prices in both cities have exceeded expectations and have risen sharply, as demand for single-family homes has risen significantly, the bank noted, particularly in the suburbs.

For this reason, “affordability is already exhausted [and] the new supply should be considerable in the coming quarters, ”the bank said.

Prices are already high, and an “expected appreciation of the Canadian dollar will reduce the attractiveness of Toronto property to foreign buyers when travel restrictions are lifted,” UBS said.

For Vancouver, the bank said a tax on foreign buyers had the desired effect of chilling scorching price hikes a few years ago, but they are on the rise again and appear overvalued, if not in bubble territory.

“The rental market has been under pressure as immigration has plummeted due to the pandemic,” UBS said. “Overall, still sky-high valuations are limiting price increases due to the uncertainty surrounding economic growth.

The cost of purchasing in large cities

Based on local wages, UBS calculates that it would take a skilled worker seven years of income to afford a 650-square-foot home near downtown Toronto and eight years in Vancouver.

That compares to just three years in Chicago, four in Boston and five in Los Angeles. In contrast, it would take 20 years for the same worker from Hong Kong to buy a place and 14 years in London.

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