According to the UBS Global Real Estate Bubble Index for 2017, the risk of a Toronto housing market bubble is real.
In fact, the report states that “bubble risk seems greatest in Toronto, where it has increased significantly in the last year.” Comparable cities in other countries — Stockholm, Munich, Sydney, London, Hong Kong and, closer to home, Vancouver — all remain at risk, but the potential for a Toronto housing market bubble is in the most precarious position.
The UBS report defines a bubble as being “a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” Typical signs can include a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity.
Over the long run in Canada, Vancouver and Toronto’s house prices have appeared similar.
“Neither city was dragged down by either the financial crisis or weakening commodity prices and the depreciation of the Canadian dollar buffered them against economic headwinds,” states the report.
“An overly loose monetary policy for too long, in addition to buoyant foreign demand, unmoored their housing markets from economic fundamentals, and both markets are now in bubble risk territory.”
In 2007, the report states a skilled service worker in Toronto would have had to work for four years to be able to buy a 650 sq. ft. apartment near the city centre. Today, that same person would have to work for about seven years to afford the same location.
In 2007 as well, an apartment would have needed to be rented for 16 years to pay for it. Today, that same-sized apartment would have to be rented for about 27 years to make the same amount — an increase of 11 years.
Last year, price growth in Toronto accelerated and reached an excessive 20% year-on-year in the last quarter. Real prices have doubled in 13 years, while real rents have increased by only 5% and real income by less than 10%. According to the report, a strengthening Canadian dollar and further interest rate hikes would “end the party.”
To see the full UBS Global Real Estate Bubble Index, visit: https://www.ubs.com/global/en/wealth-management/chief-investment-office/features/global-real-estate-bubble-index-2017.html.
When talking about the potential for a Toronto housing market bubble, it’s critical that lenders not only evaluate a city as a whole, but also evaluate specific neighbourhoods to look at trends and forecast changes in property values and volume of debt registered against those properties.
Purview can give you access to tools evaluate the housing market in both cities and neighbourhoods. Call us today at 1.855.787.8439 or visit www.purview.ca.