The study points to San Francisco as the U.S. city that is most at risk of an upcoming housing crash, while Toronto finds itself at the top of the list for at-risk cities overall in North America.
But, these two urban centers are not alone; the study notes a total of seven North American cities that could experience a real estate bubble – not just in the coming months, but in the coming years, as well.
The study by Swiss investment bank UBS looked at mortgage changes, rent prices, and incomes, and construction levels in cities around the world. According to the study, some cities show accurate values in their housing markets, while others appear to be overvalued and at risk for market crashes.
In the report’s introduction, the authors noted:
“Low affordability already poses one of the biggest risks to property values in urban centers. If employees cannot afford an apartment with reasonable access to the local job market, the attractiveness and growth prospects of the city in question drop.”
Each city examined in the study was given a bubble index score to indicate whether it was undervalued (-1.5 to -0.5), fair-valued (-0.5 to 0.5), overvalued (0.5 to 1.5) or at bubble risk level (> 1.5).
In North America, Canadian Cities Most at Risk
The two Canadian cities that made the list – Toronto (2019 bubble index score: 1.86) and Vancouver (2019 bubble index score: 1.61) – have the highest risk among all North American cities.
Toronto real estate values have been increasing quickly, tripling between 2000 and 2017. However, potential buyers have been holding off due to affordability issues and limited new construction in the city. This puts the Toronto’s housing market at risk with a potential situation in which inadequate incomes and demand for housing don’t align with high home values – causing properties to sit on the market for months.
The situation with homes in Vancouver has been similar to Toronto, with stagnant demand for housing and skyrocketing prices in the last decade. The city attempted to address affordability issues with the introduction of vacancy fees and a foreign buyer tax, but the housing market here has begun to plateau, nonetheless.
Two California Cities Make the List
Two of California’s major cities also found themselves on this year’s list of most-at-risk cities: San Francisco (2019 bubble index score: 1.15) and Los Angeles (2019 bubble index score: 0.99).
Thanks to Silicon Valley and the tech boom, the prices for homes in San Francisco increased so quickly that many average workers would not be able to afford real estate here; in fact, doing so would require more than 116% of their annual salary. Besides affordability issues, the city is also experiencing decreased interest from foreign buyers. Some experts believe the city’s rapid growth may be nearing the end, causing the market to slowly stabilize.
Los Angeles real estate has also experienced major price increases, although not quite as drastic as those seen in San Francisco. Home prices here have increased more than 50% since 2012, surpassing the average income. The city’s high demand for housing is difficult to meet due to its affordability issues.
Risks on America’s East Coast
New York (2019 bubble index score: 0.50) and Boston (2019 bubble index score: 0.36) represent the U.S. East Coast cities that are at risk of a housing crash.
Recently, prices for homes in New York City have not increased as quickly as they have in other parts of the country. While the market here is still overvalued compared to other cities, recent real estate regulation bills and higher taxes have stalled home purchases and curbed market expansion.
Boston’s housing market looks a bit healthier when compared to other cities. However, slower price growth here might fail to offset increased discrepancies between income and home prices. While prices for homes in Boston have been consistently increasing since 2012, growth rates have not followed the same trend – which could lead to a future real estate bubble.
Illinois’ Largest City Rounds Out the List
Capping off the list is Chicago (2019 bubble index score: -0.77), the only undervalued city to make the list. The city has experienced some growth, but prices for Chicago properties are more than 25% lower than they were in 2006. The city is affordable, but there is little growth in the job market, population and economic situation here, potentially resulting in a stagnated market.
While these seven North American cities display signs of an impending housing market crash, the risks might be averted through careful planning and various economic measures. However, only time will tell how these markets will manage their current situation and what route they will take.