In North America, Vancouver is the city second-most at risk for a real estate crash, following Toronto. While falling prices have made housing in the city less expensive, Vancouver real estate is still overpriced and the market is vulnerable.
This year’s UBS Global Real Estate Bubble Index 2019 indicated that seven cities in North America could be potentially headed for a real estate crash. The study looked at 24 major cities around the world and analyzed various indicators, such as rent prices in relation to incomes, mortgage changes, and construction levels.
The cities were ranked according to a bubble index score using risk-based classifications: depressed (score below -1.5), undervalued (-1.5 to -0.5), fair-valued (-0.5 to 0.5), overvalued (0.5 to 1.5) and bubble risk (above 1.5).
Vancouver and Toronto – the only cities in Canada to make the list – occupied the sixth spot and the second spot, respectively, of the world’s most overpriced markets.
Vancouver Drops Two Spots
Vancouver slid from fourth place last year to the sixth spot this year with a bubble index score of 1.61. Even with the change in rankings, a crash could still be imminent; prices have skyrocketed in the last 10 years, but demand falls short.
According to the Financial Post, benchmark prices for all types of homes decreased by 7.3% in September year-over-year and 0.3% month-over-month. Similarly, the benchmark price for detached homes in Vancouver dropped 8.6% compared to the previous year, while the price for condos declined by 6.5% and the price for attached homes dropped 7.2%. UBS authors wrote in the report:
“In just a couple of quarters, year-on-year price growth rates have reversed from over 10% to –7%. Sky-high valuations and overstretched affordability make the market vulnerable to even minor demand shifts.”
The slump in prices was set off by the introduction of vacancy fees and a foreigner-buyers’ tax in 2016. Nevertheless, the market began to plateau. UBS believes the situation will persist for now as prices are still 75% higher than they were a decade ago. However, downside risks are lessened by attractive financing conditions; the Bank of Canada has lowered the qualifying mortgage rate for the first time in three years.
Toronto Rises to Second Place
With a bubble index score of 1.86, Toronto climbed a spot from its third-place ranking last year; it’s now the second-most overvalued market in the world, right after Munich. Real estate prices in the city almost tripled between 2000 and 2017.
Here, limited construction and affordability problems have pushed many buyers to the sidelines. As in Vancouver, officials have introduced a series of measures such as a foreign-buyers’ tax, rent controls and tighter mortgage standards to address worsening affordability.
However, prices rose by 5.2% in September compared to the same period last year. One of the reasons behind the higher prices is a decline in supply; active listings fell by 14% to 17,254 in September.
Five Other North American Cities Make the List
Besides Vancouver and Toronto, five other cities in North America are also at risk for a potential housing crash:
- San Francisco (bubble index score: 1.15)
- Los Angeles (0.99)
- New York City (0.5)
- Boston (0.36)
- Chicago (-0.77)
San Francisco is the third city in North America at risk for a real estate bubble. The prices here were driven higher as the city became home to Silicon Valley and big tech. Conversely, Chicago is the only undervalued market that made the list. The city could experience a market slump due to stagnant employment growth and declining population.
Vancouver and these six other cities in North America might be headed for real estate crashes if their situations don’t improve. However, there are various measures that can be taken to prevent a housing bubble. It remains to be seen how these markets will evolve in time.