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Toronto and Vancouver are in housing bubbles, Swiss Bank warns | CBC News

Average house prices rose 14 per cent in the past year, the Canadian Real Estate Association said Friday, adding to concerns that Canada’s most expensive real estate markets are dangerously overvalued.

The group that represents realtors across the country says the average price of a Canadian home sold on its MLS system was $686,650, almost 14 per cent higher than it was in the same month a year ago.

Canada’s inflation rate hit four per cent in August, the fastest increase in the cost of living in almost 20 years. The new data on house prices Friday means that house prices are going up at more than three times that record pace.

CREA says the average price can be misleading, since it is heavily skewed by sales in the most expensive markets of Toronto and Vancouver. It trumpets another number, known as the MLS House Price Index (HPI), as a more accurate gauge of the overall market, because it strips out some of the volatility.

But the HPI is rising by even more than the average is right now — up 21.5 per cent in the past 12 months.

“There is still a lot of demand chasing an increasingly scarce number of listings, so this market remains very challenging,” CREA chair Cliff Stevenson said.

UBS warns of bubble

The fresh numbers on prices come as a major Swiss bank was already warning that Toronto and Vancouver are home to two of the worst housing bubbles in the entire world.

In an annual ranking, UBS examines the housing markets in 24 major world cities in Europe, North America and Asia to assess them based on how expensive housing is compared to local income levels and other factors.

It then puts all the cities into one of five categories: 

  • Depressed housing market (a score of -1.5 or lower).
  • Undervalued (-0.5 to -1.5).
  • Fairly valued (-0.5 to +0.5).
  • Overvalued (+0.5 to +1.5).
  • Bubble (1.5 and up).

Six cities were deemed to have housing bubbles. Two of them are in Canada. 

Toronto got a score of 2.02. That was higher than every other city except Frankfurt, Germany, which scored a 2.16.

Vancouver scored a 1.66, just behind Hong Kong (1.90), Munich (1.84) and Zurich (1.83).

The bank says house prices in Toronto have effectively doubled in the past decade. Government interventions through things like foreign buyers taxes and rent controls caused the market to take a breather in 2018 and 2019, but things have only accelerated since, the bank said.

“Real prices increased by almost eight per cent from mid-2020 to mid-2021,” the bank said.

The bank says price gains are being fuelled by record-low mortgage rates, which are not expected to last much longer once the Bank of Canada inevitably has to raise its rate.

That “could lead to an abrupt end to the current housing frenzy,” the bank said.

‘A fast rebound’

Things don’t look much better in Vancouver. Taxes on vacant homes and foreign buyers in 2016 cooled what was then a red-hot market, as prices rose by more than 20 per cent that year. Those moves seemed to relieve some of the pressure, as prices declined by 10 per cent between 2018 and 2019.

“Since then, however, lower prices, falling mortgage rates and looser stress test rules have enticed households to buy properties again, leading to a fast rebound,” UBS said. “From mid-2020 to mid-2021, property prices increased by 11 per cent, offsetting past losses.”

High prices aren’t just bad for buyers who plan to live in their expensive homes — they don’t augur well for investors or landlords, either.

According to UBS, anyone buying an investment property with the intent to rent it out would need to rent it for 31 years in Vancouver to cover the price of buying it. In Toronto, it would take 28 years.

The bank defines a bubble as “a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.”

“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,” the bank said.

“On average, bubble risk has increased during the last year, as has the potential severity of a price correction in many cities tracked by the index.”

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