Vancouver and Toronto, Canada’s largest real estate markets, have seen a significant shift in housing market risk, according to the latest UBS Global Real Estate Bubble Index for 2023. This year’s report indicates the cities are no longer in the bubble risk category; instead, they are considered “overvalued.”

Price corrections across the board

The report highlights that the sharp drop in housing market imbalances was not solely due to declining house prices but also a result of inflation-driven income and rental growth. Rising financing costs, driven by the increase in mortgage rates, have caused annual price growth to come to a standstill, following a sharp 10 per cent jump the previous year. According to the index, only Zurich and Tokyo remain in the housing bubble risk category.

Claudio Saputelli, head of real estate at UBS Global Wealth Management’s Chief Investment Office, noted, “In inflation-adjusted terms, prices are actually 5.0 per cent lower now than in mid-2022. On average, the cities lost most of the real price gains made during the pandemic and are now close to mid-2020 levels again.”

UBS notes that Toronto, one of the cities with the highest risk scores in last year’s edition, “prices tumbled by 15 per cent in the last four quarters. A combination of high market valuations and relatively short mortgage terms also put prices under strong pressure in Stockholm and to a lesser degree in Sydney, London, and Vancouver.”

However, this downward trend has not been uniform across all cities. Madrid, New York, and Sao Paulo, which had moderate risk valuations, continued to see prices rise at a moderate pace.

Inflation reduces bubble risk

Inflation played a pivotal role in reducing bubble risk in the global housing market and while income growth and price corrections have improved affordability to some extent, the amount of living space financially accessible to skilled service workers is still 40 per cent lower than before the pandemic began.

The Canadian real estate landscape

Between mid-2019 and mid-2022, prices in Vancouver increased by 25 per cent, and Toronto saw a nearly 35 per cent increase. However, this growth was accompanied by a rapid rise in household leverage. A combination of increasing financing costs and higher mortgage stress test rates tipped the scales, resulting in Vancouver and Toronto experiencing a correction of over 10 per cent in inflation-adjusted terms since mid-2022. Yet, the demand for living space in these cities is steadily increasing, with the pressure now shifting to the rental market.

The number of years a unit in each city needs to be rented out to pay for that unit.

From ⁦@UBS⁩ bubble index pic.twitter.com/ZxF0ot07hd

— Daniel Foch (@daniel_foch) September 21, 2023

Read the full report here.