In North America, Toronto is the city with the highest risk for a potential real estate bubble. Vancouver and five other major urban centers on the continent are also susceptible to an upcoming housing crash.
The study looked at 24 major cities worldwide and analyzed rent prices in relation to incomes, mortgage changes and construction levels. The data showed that some markets are accurately valued, while others are highly overvalued – which means they could be heading toward a potential housing crash.
Cities were ranked according to a bubble index score to indicate whether they were depressed (score below -1.5), undervalued (-1.5 to -0.5), fair-valued (-0.5 to 0.5), overvalued (0.5 to 1.5) or a bubble risk (>1.5).
Toronto: World’s Second-Most Overvalued Housing Market
Up one spot from last year, Toronto is now the second-most overvalued housing market worldwide with a bubble index score of 1.86, following only Munich at 2.01. Of all the North American cities in the study, Toronto is the first to risk a housing crash. The cost of living in the city has spiked with real estate prices almost tripling between 2000 and 2017.
According to BNN Bloomberg, benchmark prices climbed 5.2% in September year-over-year across all types of homes – the largest increase in 21 months. Prices were pushed higher by a decline in supply; the number of active listings decreased by 14%. The average price of a home in Toronto rose by 5.8% in September to $843,115 – the highest price this year.
Affordability concerns and limited new construction have prompted many buyers to wait on the sidelines. Consequently, the Toronto real estate market is at risk of a housing crash in the coming years as incomes and demand lag behind skyrocketing home values. The authors noted in the report:
“As in Vancouver, local authorities introduced a foreign-buyers’ tax, rent controls and tighter mortgage standards to tackle worsening affordability. Eventually, the housing frenzy abated and inflation-adjusted prices have stagnated over the last four quarters.”
Despite all of these measures, UBS believes a major price correction is unlikely in the short term due to decreasing supply, improving mortgage conditions and a weakening Canadian dollar.
Vancouver: 6th on the List
Vancouver has a bubble index score of 1.61 – making it the sixth-most overvalued real estate market in the world and the second-most overvalued in North America. The city has a situation similar to Toronto with skyrocketing prices and not enough demand. Officials introduced vacancy fees and a foreign buyer tax to curb affordability problems, but the market is showing no signs of accelerating.
Likewise, UBS concluded that a shift was also unlikely in Vancouver as regional housing supply is increasing and prices are 75% higher than they were a decade ago. However, downside risks are lessened by attractive financing conditions; the Bank of Canada decreased the qualifying mortgage rate for the first time since 2016.
Additionally, benchmark prices in Vancouver dropped 7.3% in September compared to the previous year according to the Financial Post. Compared to August, they decreased by 0.3%.
5 Other North American Cities at Risk of Housing Crashes
Five other cities in North America are also at risk of housing crashes:
- San Francisco (bubble index score: 1.15)
- Los Angeles (0.99)
- New York City (0.5)
- Boston (0.36)
- Chicago (-0.77)
Chicago was the only undervalued city that made the list. Although the urban center has seen some growth, prices are more than 25% lower than they were in 2006. While affordability is not an issue here, sluggish employment growth and a declining population might lead to a stagnating market.
While Toronto and other North American cities show signs of a housing bubble, it is still possible to mitigate the risks by taking economic measures and planning strategically for the future. Time will tell how these markets will evolve.