It's not a title any city wants to have, but Toronto has been crowned number one in UBS's Global Real Estate Bubble Index.
Canada's largest housing market scored 2.24 on the index to put it in first place, with Frankfurt, Germany a close second at 2.21 and Zurich in third with an index score of 1.81.
The only other Canadian city to appear on the index is Vancouver in sixth place with a score of 1.70, sandwiched between Hong Kong and Amsterdam.
UBS cited strong population growth and, until more recently, ultra-low mortgage rates as being the main drivers of the "long-term property bonanza in both Canadian cities."
The abundance of real estate investors in the market also received a special nod in helping prop up home prices.
"Bubble risk for both Canadian cities is again highly elevated," UBS said in the report, released on Wednesday.
The 26-page report examined 25 major real estate markets around the world and is based on second-quarter data.
Toronto and Vancouver have seen their home prices drop meaningfully this year but climbing mortgage rates have offset any improvement in affordability for homebuyers. The most recent data from regional real estate boards show Greater Vancouver home sales sank 46.4 per cent in September compared to last year, while Greater Toronto home sales dropped 44.1 per cent over the same timeframe.
"In such overheated markets, with already very stretched housing affordability, the recent rate hikes by the Bank of Canada could be the last straw that broke the camel's back," the report said.
"New buyers and owners during mortgage renegotiations not only need to pay higher interest rates but are also required to provide more income to qualify for a mortgage."
Many realtors, real estate associations and other market stakeholders have repeatedly called for Canada to build its way out of the affordability crunch, but UBS appeared to shrug off a lack of housing supply as a main driver of unaffordability.
"The housing boom has become more of a countrywide phenomenon and is therefore hardly driven by a shortage of construction," it said.
Scott Ingram, a chartered professional accountant and realtor with Toronto-based Century 21 Regal Realty, says it was a "definite head-scratcher" on why the housing shortage was not mentioned more prominently by UBS, especially considering Canada's ramped-up immigration targets.
He also says recent price declines have removed some of the vulnerabilities in Toronto's housing market.
"Does our market have some bubble risk? Absolutely. Has some of the air already been let out in the last few quarters? Yes. That might be true for other markets too, but by the time this report gets around to using Q3 and Q4 information, that magic box score of theirs should come down," he said in an email.
Bubbles in asset classes are difficult to prove if they're still ongoing, UBS acknowledged, adding that the true existence of bubbles is only usually proven after they burst.
However, it says "historical data reveal patterns of property market excesses. Typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity," and that its bubble index was based on these types of criteria.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.