You have to work 6 years to afford a 650 square foot home in Toronto

The UBS Global Real Estate Bubble Index 2018 was released last week, ranking Toronto third on a list of housing markets at risk of a bubble burst.

For those unsure of what a bubble is, it’s when an asset is significantly mispriced, but the existence of the bubble isn’t known until it bursts. That’s why UBS says these markets are at risk of a bubble. It’s not a bubble until there is no bubble, which makes it scary and easy to throw around the term loosely.

Hong Kong and Munich are at the greatest risk of a bubble, with Toronto in third, followed by Vancouver, London, and Amsterdam. In the last five years, housing prices in major cities have gone up 35% on average. In Hong Kong, it would take a skilled worker 22 years to afford to buy a 650 square foot unit. A decade ago, a resident of Hong Kong would have had to work for 12 years to buy the same unit.

In Toronto, a skilled service worker has to work for six years to afford to buy a 650 square foot unit. Not that bad when you compare it to Hong Kong. When it comes to the amount of time to save for a home purchase, Toronto was actually a bit lower on the list. If you don’t want to save for that long, consider moving to Chicago where it should only take you three years (assuming you’re buying a 650 square foot unit and you’re a skilled worker).

Saving for a home in Vancouver? It’ll take you slightly longer than in Toronto. According to UBS, a skilled service worker has to work for nine years to afford a 650 square foot unit. In the last 12 years, housing prices in Vancouver have doubled, but property taxes and the foreign buyer tax have slowed the boom. There’s been an increase in supply in Vancouver and waning demand, so prices are already dropping.

UBS points out that prices in Toronto have been stabilizing over the last four quarters. It all started with the Ontario Fair Housing Plan, which introduced cooling policies like rent control and taxes for foreign buyers. With stricter mortgage rules and rising interest rates, the market has moderated.

Despite the foreign buyer tax, UBS says that the short-term weakening of the Canadian dollar may attract overseas investment in the near future. But, those foreign investors may look to Ottawa or Montreal instead to avoid the tax.

So, who thinks Toronto is at risk of a bubble burst? The average price per square foot in downtown Toronto right now is hovering around $1,000 per square foot. There’s been talk of a new King West project starting at $1,500 per square foot, and a well known market analyst has predicted prices hitting $2,000 per square foot.

With numerous tech companies like Sidewalk Labs, Microsoft, Pinterest, and Shopify opening up shop and expanding in Toronto, it seems unlikely that demand will decrease, and we’re already suffering from a lack of supply.