Canada’s priciest city to buy residential real estate also has the biggest risk of being in a bubble, according to a new international study of real estate markets.
The UBS Global Real Estate Bubble Index 2016 listed 18 cities around the globe and their risk and found Vancouver with the greatest probability of a bubble.
“Real house prices have increased by more than 25 per cent since 2014 in the wake of a weak Canadian dollar which apparently stimulated Asian demand even further,” the bank said, in its 22-page report released Tuesday. “Moreover, loose credit conditions have offset the economic slowdown due to weak commodity prices. Mortgage growth rates have been accelerating lately. In response, to still-high foreign demand, the local government has introduced an additional property tax for non-resident investors. The risk of substantial price correction appears very elevated.”
Vancouver prices have already started falling based on average prices, though the Real Estate Board of Greater Vancouver said in August its Multiple Home Prices Index composite benchmark price for all residential properties in the metro area was $933,100, up 31.4 per cent from a year earlier. The British Columbia Real Estate Association said the average price of a home sold in Greater Vancouver last month was $833,065, down 7.5 per cent from a year ago.
The B.C. government’s new 15 per cent additional property transfer tax on foreign-owned or backed purchases was announced July 25 and went into effect Aug. 2. Realtors have reported some consumers, including foreign buyers, are walking away from deals and some expect an even larger fallout when September housing results are released next week.
The UBS study does not just single out Vancouver. It notes that with a third of all government bonds offering negative yields, investing in tangible assets remains popular.
“It is hardly any wonder that housing markets are again overheating, just a few years after the last major wave of a global correction,” the report states, adding there is significant overvaluation of housing in key financial centres.
UBS says the cities with overheating have a key common characteristic, excessively low interest rates that don’t match the strong performance of the real economy. The eurozone, Australia, the United Kingdom and Canada are all listed for keeping rates too low.
“When combined with rigid supply, as well as sustained demand from China, this has produced an ideal setting for excesses in house prices,” write Claudio Saputelli and Matthias Holzhey, of UBS, in their report.
After Vancouver, the next four bubble cities in order were London, Stockholm, Sydney, and Munich.
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