T.O. passes Hong Kong, Paris in value risk

Only Frankfurt, Munich higher for overvalue of residential real estate

Toronto is one of seven world cities most at risk of a residential real estate bubble, according to a new report released by UBS this week.

Toronto scored 1.96 in the UBS Global Real Estate Bubble Index, the third-highest score below Frankfurt and Munich, which scored 2.26 and 2.35, respectively.

The bank’s report scores 25 cities across the world, sorting them into four tiers: bubble risk, overvalued, fair valued, and undervalued with higher scores going to locations with higher risk.

Toronto is in the bubble risk category for the third consecutive year, surpassing Hong Kong, Paris and Amsterdam.

UBS says Vancouver real estate had dropped out of bubble risk territory this year but is still overvalued, with a score of 1.37, down from 1.92 in 2018.

Other overvalued cities in the report were New York, San Francisco and Sydney, Australia with scores less than 1, while Boston, Singapore and Dubai had fair real estate values and Chicago real estate was considered undervalued.

The scores are based on how home prices compare to incomes and rents, and whether mortgage lending and construction spending are excessive compared to the growth in the overall economy.

The scores do not predict whether or when a bubble will “pop” and cause home prices to fall. The existence of a bubble, UBS said, “cannot be proved unless it bursts.”

Instead, the authors write, they are comparing present conditions with housing bubbles throughout history.

UBS gives cities a score -1.5 if they are depressed, -1.5 to -0.5 if they are undervalued, -0.5 to 0.5 if they are fairly valued, 0.5 to 1.5 if they are overvalued and above 1.5 if they are a bubble risk.

For Toronto and Vancouver, UBS looked at statistics from Statistics Canada, the Bank of Canada, Sauder School of Business, Canada Mortgage and Housing Corp, Toronto Regional Real Estate Board, condos.ca and Real Estate Board of Greater Vancouver, among other sources.

Demand for single-family homes in the suburbs have pushed Toronto prices up nearly six per cent in four quarters, stretching affordability, the report said.

“Given Toronto’s robust population growth and lower mortgage rates, prices there have doubled within only a dozen years,” the report said.

“Moreover, the expected appreciation of the Canadian dollar will curb the appeal of Toronto’s property to foreign buyers when travel restrictions are lifted.”