Toronto Has The Worst Housing Bubble According To The UBS Real Estate Bubble Index For 2022!
Introduction
The UBS real estate bubble index report is back for another year, and this year we are featured in the number one spot-and this is one of the few times we don’t want to be number one.
This can actually be pretty scary for some people, and yes housing prices have gone up like crazy in the past few years but it still doesn’t make much sense that Toronto is less affordable compared to cities like London, New York or even LA.
And so, let’s break down the report and give you the real facts.
Key Metrics
In their bubble index report, UBS uses five metrics to rate and rank cities:
- the price to income ratio;
- the price to rent ratio;
- the city to country ratio;
- the mortgage to GDP index;
- and the construction to GDP index.
Two out of the five metrics are based on price, and so if price growth has been really strong, you can pretty much bet that the city will be high up there in the UBS ranking.
But the less obvious thing that no a lot of people see is that they’re actually stacking how Toronto is doing in 2022 against Toronto on average since the 80s, and not Toronto compared to another city.
Price To Income
Take a look at this chart, which actually shows the price to income ratio between cities. As you can see, Toronto is now sitting closer to the bottom of the chart so it’s actually pretty affordable on the global scale.
Here’s another way to see how this metric is a bit off for Toronto. It takes someone in Paris 15 years to buy a home and yet they get assigned a yellow, which means they’re at a lower bubble risk. In Toronto, it takes around 7 years, but we’re actually a red, representing a bigger bubble risk. This is because of the way UBS interprets these numbers, comparing a city with its historical self instead of city to another city.
It’s not because we’re less affordable than other major cities nowadays, it’s just that we’re now moving up in the ranks as a global city and that’s why prices have gotten more premium in recent years.
Price To Rent
Our price to rent metric is also coming in red for a similar reason. On a global scale, we are sitting right in the middle, but we are marked as red in the UBS price to rent metric. Tokyo and Singapore are sitting higher on this global scale, and yet they are yellow instead of red.
The one thing that I do want to highlight from this section is that rent growth is a global theme, not just something that’s unique to Toronto. Urbanization is back on track across the world. Strong rent growth is happening across all of the major cities, and renters are coming back to cities.
City To Country
On the city-to-country metric, we’re a yellow, which is actually better than many other cities around the world. That’s simply because the fundamentals in Toronto are much stronger than Canada as a whole. Canada has aggressive immigration goals, and most new immigrants end up coming to Toronto.
On the supply side, we’re the only city in Canada that probably has a real housing crisis: we don’t have land in Toronto to build out, and there is a lot of red tape for densification.
Mortgage To GDP
Moving on, we are sitting in the red in terms of the mortgage to GDP ratio. Here I would have to agree that Canada’s home are highly leveraged ,especially in more recent years with a growing number of real estate investors. This will make our housing market have more volatility, and be more vulnerable to interest rate movements.
In our current situation where prices are trending down, it’s possible to see bigger swings downwards on Canada compared to other cities with lower debt ratios. And it’s not just our city here in Toronto. The only other Canadian city on this chart, Vancouver, seems to be also seeing the same problem.
Construction To GDP
Let’s move on to the last construction metric. Here, UBS stacks a city’s construction against its country GDP, which might be a bit off, especially over longer periods of time. Perhaps 30 years ago, the growth in Toronto might have been more in line with the rest of Canada.
But in more recent years, Toronto has been growing much faster. What this means is that the pace of construction should also grow a lot faster than the rest of the country, and this shouldn’t be an indication of a housing bubble.
Takeaway
As you can see, I have some issues with the UBS methodology, and so I’d say that you should take this report with a grain of salt. From a global standpoint, we’re actually still affordable.
Are we in a housing bubble? Looking back, we probably were towards the end of the low interest rate era. Canada real estate does see bigger swings due to our buyer profile. But our prices have fallen 25% from the peak since then in Toronto, and this UBS report actually only looked at data until the end of June. Since then, prices have continued to fall and rents have continued to shoot up, and so it’s possible that we might have come down in ranks since then.
One last suggestion from us to UBS is that it might be a good idea to consider a city’s growth prospects as another metric. If you see high price growth in a city like Hong Kong, where the population is on the decline, there’s less of a real reason to support sustained price growth, and this should be a big bubble risk red flag.
But when you see growing prices in Toronto, a city with fast population growth and a housing crisis, that’s fundamentally why prices are going up. Adding this consideration should help to balance out a lot of the concerns I’ve had with the UBS methodology.
I encourage you to read past a lot of the scary real estate headlines to understand the full picture. The news is made to scare people, and even investment banking analyst reports might not tell the complete story. At the end of the day, the takeaway is that Toronto has been a growing city in recent years. This is why our price growth has been so strong and the draw to urban centres hasn’t gone away after COVID.
How We Can Help
When we combine what’s been happening lately with the federal government’s strong projected immigration goals, higher interest rates won’t be able to keep prices dropping in Toronto for long. So if you’re interested in entering the Toronto real estate market and want to find out more about what’s going on, we’d be happy to chat.
We’re a real estate sales brokerage that focuses on investing in real estate in Toronto, and we’re all about making decisions with numbers.
When you work with us, we take the time to understand your needs, teach you the ropes, show you these deals, and eventually help you buy the best one for you. But that’s not all. Our team also provides renovation guidance, leasing and property management if you need it. So, just connect with us if you want to learn more about our services!
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