A Swiss bank has concluded that Toronto's housing market is in bubble territory, as homes in the city are more overpriced based on local rents and incomes than in places like New York, San Francisco, London and Hong Kong.
In an annual ranking, UBS looks at 25 major cities in Europe, North America, the Middle East and Asia to track and compare the risk of housing bubbles at the local level in each of them, and it then assigns them a number based on that ranking.
A score above 1.5 indicates the bank thinks there's a risk of a bubble, which UBS defines as "a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts."
A score of between 0.5 and 1.5 suggests the market is merely overvalued, while a score of below 0.5 to -0.5 suggests houses are probably fairly valued. Anything below that implies the city is undervalued based on local incomes, demand for housing and other factors.
Toronto scored 1.96, which placed it behind only the German cities of Munich at 2.35 and Frankfurt at 2.26.
No other North American city was deemed to be in bubble territory, including Vancouver, New York, Los Angeles, Boston, Chicago or San Francisco.
It's the third year in a row that Toronto has been deemed to be in a bubble, after scoring 1.95 in 2018 and 1.86 in 2019.
Vancouver scored 1.37, which means UBS thinks the city's real estate is only slightly overvalued. Two years ago, Vancouver was also in bubble territory, with a score of 1.92. But prices have come down in the two years between that report and the advent of COVID-19.
But the pandemic has had an unexpected impact on Canada's real estate market. House prices in both cities have blown past expectations and risen sharply as demand for single-family homes has grown considerably, the bank noted, especially in the suburbs.
Because of that, "affordability is already stretched [and] new supply should be considerable in the coming quarters," the bank said.
Prices are already high, and an expected "appreciation of the Canadian dollar will curb the appeal of Toronto's property to foreign buyers when travel restrictions are lifted," UBS said.
For Vancouver, the bank said that a foreign buyer's tax had the desired effect of cooling red-hot price gains a few years ago, but they are once again going up and looking overvalued, if not in bubble territory.
"The rental market has been under pressure, as immigration dropped due to the pandemic," UBS said. "Overall, still sky-high valuations limit the upside for price growth given uncertainty about economic growth.
The cost of buying in major cities
Based on local salaries, UBS calculates that it would take a skilled service worker seven years worth of earnings in order to afford a 650-square-foot home near downtown Toronto, and eight years in Vancouver.
That compares with just three years in Chicago, four in Boston and five in Los Angeles. On the opposite end of the spectrum, it would take that same worker in Hong Kong 20 years to buy a place, and 14 years in London.
Real estate investors, meanwhile, at current prices would need to rent out their new properties for 28 years in Toronto, and for 29 years in Vancouver, just to break even based on current prices.
"Big urban centres will remain economic hubs and should continue to attract people but sky-high housing market valuations, coupled with noticeably weaker demand prospects, suggest investors should be cautious," UBS said. "Though real estate is often regarded as a legacy investment, now is certainly not the worst time for owners of multiple properties to consider profit taking."