Toronto: The world’s most over-valued city?

Toronto has overtaken Vancouver as the city with the world’s most over-valued property, according to UBS’ new Housing Bubble Index. The report analyses prices, incomes and rents to determine affordability around the globe – and we’ve broken it down into a handy infographic.

Mapped onto the world stage, it is easy to see how widespread the world’s most expensive property markets are – a fact that is driven not necessarily by rising house prices, but how property is priced in relation to the wider economy.

According to the UBS Global Real Estate Bubble Index, the bubble risk in select world cities has increased significantly over the last five years. Real house prices of those metropolises within the bubble-risk zone have climbed by almost 50% on average since 2011. In Munich, Toronto, Amsterdam, Sydney and Hong Kong, prices rose more than 10% in the last year alone.

Over the long run, Vancouver and Toronto’s house prices have moved in rough lockstep. Neither city was dragged down by either the financial crisis or weakening commodity prices: the depreciation of the Canadian dollar effectively buffered them against economic headwinds. Vancouver had the upper hand until 2008, but Toronto has been catching up
rapidly in recent years, notes UBS, with price growth reaching 20 per cent year-on-year in the last quarter.

It is the combination of real prices doubling in 13 years and real income rising less than 10 per cent that has pushed the city up the rankings. Price growth in Vancouver, meanwhile, peaked in the middle of 2016, when values soared 25 per cent year-on-year, but has slowed to 7 per cent this year, following a range of measures introduced to the city, including added tax on foreign purchases.

The index attributes the overall rising bubble risk in recent years to attractive financing conditions in many cities, with falling mortgage rates making buying a home vastly more appealing. In European cities, for example, the annual usage costs for apartments (mortgage interest payments and amortization) are still below their 10-year average, despite real prices escalating 30% since 2007.

At the same time, the global increase in wealthy households seemingly creates constant demand for the most attractive residential areas, while building activity cannot keep pace with that demand.

As a result, over the last four quarters, the UBS Global Real Estate Bubble Index rose in all cities in continental Europe. Sharp increases were measured in Paris, Amsterdam, Frankfurt and Munich. All European cities, apart from Milan, are at least in overvalued territory.

“Improving economic sentiment, partly accompanied by robust income growth in the key cities, has conspired with excessively low borrowing rates to spur vigorous demand for urban housing,” says UBS.

Indeed, that economic improvement has helped to boost recovery in many of these cities in the years since the financial crisis, encouraging domestic and overseas investment. Prices in Munich, Amsterdam or Stockholm have set records after being adjusted for inflation. Frankfurt has also been picking up momentum. Furthermore, housing market valuations revived again in Paris and have regained nearly all the lost ground since 2012.

“London remains on a separate path than its peers in continental Europe. Low affordability, the economic slowdown and uncertainty about the UK’s future relationship with the EU kept housing demand in check for the last four quarters, during which the index declined,” notes UBS. “But the city is still in bubble risk territory.”

The index, it should be noted, does not predict whether and when a correction will set in, to whatever degree, but suggests caution when buying a home in cities where such a correction has a higher probability in the future.

For those looking to invest in the USA, for example, house prices in many cities remain below their 2008 peak in real terms, with the exception of San Francisco, where real prices have increased by almost 65% since 2011. That suggests overvaluation but there is no bubble risk, because of the city’s strong economic fundamentals amid the astonishing boom of tech companies. Chicago, meanwhile, remains undervalued, just as it was last year.

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