Swiss investment bank UBS might think twice about lending out $4 million for that Toronto bungalow, since the multinational deems the city’s real estate market the second biggest risk in the world.
The UBS Global Real Estate Bubble Index ranks Toronto just behind Frankfurt, Germany among major urban markets with overpriced housing that is not supported by incomes and demands outsized mortgages.
As a result Canada, alongside Hong Kong and Australia, has seen the most significant increase in debt-to-income ratios.
The index gives markets with a fair value a score between -0.5 and 0.5, and overvalued homes a score between 0.5 and 1.5, which is where New York (0.54) and Los Angeles (1.2) land. Higher than 1.5 is deemed a bubble risk. Vancouver is at 1.6 and Toronto is 2.02, not far behind Frankfurt at 2.16.
Current real estate listings in Toronto certainly support the bubble risk index’s findings.
Consider the fixer-upper bungalow at 12 Kirtling listed for $3.9 million. The home sits on a large lot in a coveted neighbourhood. And the listing invites prospective buyers to purchase the property and perhaps throw a couple more million on building a mini-mansion like the one down the street listed for $12.5 million. But the nearly $4 million bungalow in need of TLC, according to the listing, has been sitting on the market for nearly a year, since there aren’t too many people living in Toronto who can afford such astronomical real estate prices.
That’s pretty much why Swiss bankers say we’re living in a bubble.
“[The] lack of affordability of home ownership has evidently not been an obstacle to price increases,” says UBS, noting that Toronto has been gaining based on strong population growth and low mortgage rates. After the market cooled for a little bit, prices bounced back up, with the average selling price for a detached in Toronto rising higher than ever in September.
The report’s authors also note that real estate in major urban centres across the globe continued to climb in perceived value even though they took a hit during the pandemic. “Record low financing costs and the entrenched expectation of long-term value gains have made owning a home so appealing that the price and debt level don’t seem to matter – however, this may prove to be a fallacy.”
However, UBS seems to expect the Bank of Canada to play a hand that could turn things around. The report says that high price levels are increasingly dependent on low interest rates, which they expect the Bank of Canada to raise in 2022, discouraging foreign real estate investments. This, in turn, could lead to an abrupt end to the current housing frenzy.”