A Swiss mega bank is warning the global credit bubble has produced a global real estate bubble. UBS published its 2022 Global Real Estate Bubble Index this week, and Toronto took the top spot. Vancouver remains in the Top 10, with the bank noting all of Canada is generally frothy. The recent price growth is attributed by a rapid expansion in credit, and that won’t last. As the economy slows, the last pillar holding up the market is starting to weaken.
Global Real Estate Prices Are Bubbly, Especially In Credit Bubbles
Global real estate prices are growing at one of the fastest rates in history. UBS analysts found prices in the 25 markets tracked for bubble risk have increased an average of 10% over the past year. It was the strongest increase since 2007, during the last global housing bubble.
An accompanying surge in mortgage credit makes this an even larger concern. It’s the second year it was observed in the cities they track, occurring in virtually all markets. Soaring credit growth is typical of a real estate bubble.
“The lending boom was conspicuously strong in the Middle East, the US, Canada, and Australia,” said UBS. “Since the pandemic we observe an increase in aggregate household debt relative to economic output in many of the analyzed economies.”
Global Real Estate Prices Are Falling, Last Pillar of Support Is Weak
UBS explicitly mentions they don’t state whether or not a correction is coming, but they did highlight a concern. As interest rates climb, the economy slows, and home sales fall — there’s only one thing propping up the market, and that’s labor.
It doesn’t matter which country you’re looking at, but global labor is suddenly short right across the world. “The robust labor market therefore remains the last pillar of support for the owner-occupied housing market in most cities,” wrote the bank.
They add, “With a deterioration of economic conditions, this too is at risk of faltering. Indeed, we are witnessing the global owner-occupied housing boom finally under pressure, and in a majority of the highly-valued cities, significant price correction”
Toronto and Vancouver Real Estate Are Two of The Biggest Bubbles In The World
The Canadian real estate bubble dominated the list, with two cities in the top 10 — only matched by Germany. Toronto pushed higher, to take the top spot of the world’s largest real estate bubble. Vancouver held on to sixth place, where it was found in last year’s report.
The bank warns the shortage narrative may have applied in the past, but this isn’t quite the case now. “The housing boom has become more of a countrywide phenomenon and is therefore hardly driven by a shortage of construction,” he said.
BMO recently made a similar assessment in an interview with us. The bank’s senior economist said strong fundamentals supported the market, until the recent low rate boom hit. Home prices had surged far in excess of any fundamental support, and the bank now expects a significant correction to balance this excess.