Report warns of housing bubble risk in Toronto

According to the UBS Global Real Estate Bubble Index 2017, Toronto is at the greatest risk of a housing bubble burst (out of 19 other urban centres around the world). The report was published last month.

Toronto was followed by Stockholm, Munich, Vancouver, Sydney, London, Hong Kong, and Amsterdam. But, is Toronto really at risk? Did the “bubble” already pop? Maybe it did, but it wasn’t as dramatic as everyone expected it to be.

UBS defines a bubble as “a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” There are signs to watch out for though.

One of the biggest signs is a decoupling of prices and local incomes. Over the last 5 years, housing prices have gone up 50% in Toronto, and over the last 13 years, prices have doubled. Over the same time, income has only increased by 10%. In our opinion, this is the strongest sign of a bubble in Toronto.

The other sign to watch out for is excessive construction. Depending on who you ask, Toronto is or isn’t building too much. According to the latest Housing Market Assessment from the Canada Mortgage and Housing Corporation (CMHC), Toronto is not at risk of overbuilding.  

When it comes to working and saving for a home purchase, Toronto is actually eighth lowest on the list. To buy a 650 square foot flat near the urban centre, it will take a skilled service worker (average income) 6 to 8 years to save enough money, according to the report. In Hong Kong, it would take 20 years and it’ll take 7 to 11 years in Vancouver.

To put these ranges in perspective, it would only take 3 to 4 years to save for the same unit in Chicago. Fun fact, Chicago is the only undervalued city included in the study. The most overvalued US city is San Francisco, followed by Los Angeles, Boston, and New York.

So, is Toronto in a bubble? Did it burst already? Is it about to?

The Canadian Real Estate Association (CREA) recently lowered its resale housing market forecast for 2017 and 2018, mostly due to ramifications of the Fair Housing Plan introduced in Ontario last spring. Expect fewer home sales in Canada next year, but prices are still expected to rise.

The Greater Toronto Area’s (GTA) resale market saw a big drop in sales this summer, but average selling prices were still up. The Toronto Real Estate Board (TREB) said to expect growth in listings and sales in fall 2017. We should be reviewing the September 2017 resale report soon.  

In the new home market, there was a huge drop in sales in August 2017, but the GTA is still on track for a record year of new home sales. The new condo market accounts for 80% of the GTA’s new home sales this year, and prices hit record highs earlier this year. That said, prices did recently fall month to month in both the low-rise and condo markets.

We feel like a burst implies a steep drop in both sales and prices. So far, we think Toronto is on course for a soft landing. It’s already started. In the new home market, the average low-rise price dropped from $1.3 million to $1.2 million in one month. In the same time period, the average condo price dropped approximately $20,000.

Is this steep? September’s new home and resale statistics will say a lot about the state of the GTA’s housing market.