In my opinion, it’s still a good time to buy in Toronto. According to Swiss bank UBS, we’re on top of the world — but not in a good way. Unlike those “most livable cities” and “safest (or cleanest) big cities” surveys in which Torontonians often find themselves in an enviably high position, this time it’s a list of cities with the world’s most overvalued housing markets.
The UBS Global Real Estate Bubble Index 2017, which tracks the risk of housing bubbles in global financial centres, says Toronto is No. 1, followed by Stockholm, Munich, Vancouver/Sydney, London, Hong Kong and Amsterdam. Our “bubble risk” has increased significantly in the past year, as the Toronto market nipped at Vancouver’s heels.
Cities in the bubble risk bracket have seen house prices climb by nearly 50% on average since 2011, a jump the survey says is “grossly out of proportion to the differences in local economic growth and inflation rates.”
Housing prices in Toronto have doubled in the last 13 years, while incomes increased by less than 10%. “A strengthening Canadian dollar and further interest rate hikes would end the party,” the report says. Ontario’s 16-measure Fair Housing Plan may help stabilize the market, too.
The index looks at a variety of factors including how long residents need to work to afford a place of their own, with a mere 650 square foot apartment setting the bar. In most world cities, BDO says buying such a place is beyond the budget of those earning the averaging annual income in the highly skilled service sector.
House prices have “decoupled” from local incomes, says the index; even in some cities in the “overvalued” bracket — just below bubble risk — like New York, Paris and Tokyo, price-to-income multiples now exceed 10x.
“If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink,” it cautions. That “decoupling” is one typical sign that properties are significantly overvalued. Other signs include “distortions of the real economy,” like excellent lending and construction activity.
Once in the bubble zone, the risk becomes nearly existential in nature. “Price bubbles are a regularly recurring phenomenon in property markets,” it says. “The term ‘bubble’ refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.”
Way to overachieve, Toronto. This is the first time Hogtown has made the rankings, and we managed to land ourselves top spot. A dubious distinction. The survey does not predict whether or when a correction may come, and I wouldn’t panic just yet.
If you’ve been using the last few years to move frequently, make as much profit as possible and over-leverage yourself into the next property, you may want to think about settling down, but real estate has not not trended upwards over the long haul in the GTA ever, and people have been using the “b” word for a decade now.
The recent Bank of Canada rate adjustments and Ontario’s newest measures to curb overseas investors will have their effect on prices, but they aren’t going to completely crater the market.
These things also have a tendency to happen slowly, so we’re unlikely to see prices plummet overnight. If you’ve got too much debt, it is absolutely time to get real, but most of us can ride out some moderate decreases in prices, and then there’s likely to be a fairly long price plateau.
During the last recession of 2008-09, we saw only a 10% price correction on average nationally and never experienced the kind of devastation that was common south of the order. The province’s economy remains in good health, and we don’t tend to bust and boom the way that some industry-dependent spots like Alberta tend to.
We do tend to be more influenced by what’s going on in the US, though, so if you’re concerned, keep an eye on the economy there.
Hang in there, sleep well, and as always, don’t try to time the market. If it’s a good time for you to buy and you’re not taking on more debt than you can manage if you hit a few bumps, it’s a good time to buy, whatever the report says.