Canada Global

UBS: Global Real Estate “Correction Phase” Emerging, Toronto Climbs Bubble List

One of the world’s largest banks is seeing the beginning of a global real estate correction. UBS, a Swiss multinational mega-bank, published the 2019 Global Bubble Real Estate Index. Analysts from the bank are seeing more favorable financing conditions around the world. Despite the cheap money, the bank is also seeing the beginning of a price correction in global cities.

Correction Phase Emerging Despite Falling Rates

UBS analysts are seeing a collapse in interest rates around the world, but it’s not leading to higher prices. In fact, they’re seeing a negative trend in home prices, despite more favorable financing. They believe this is due to the interest rate “bottleneck” being cleared over the past few years.

In plain english, buyers that only needed more favorable financing already got it. Lower rates are failing to bring in new buyers in significant quantities. Economic uncertainty and low growth is outweighing the positives of falling rates. Analysts from the bank called it the emergence of a “correction phase” for global markets.

Rising Urbanization “No Guarantee of Capital Gains”

Global cities that have seen bubbly growth, and there’s a lot of them, aren’t likely to see large price growth. The decoupling of home prices from local incomes are creating unsustainable cities. In the long-term, the “absence of economic viability” will shift demand away from cities.

Suburbs are expected to pick up that slack, and likely have more room to see prices grow. The firm notes global cities historically preserve inflation adjusted capital. However, a persistent economic disconnect will lead to migration from the city centre. This can lead to stagnating or lower prices. New York City is currently undergoing a similar trend outlined here.

Toronto Real Estate Climbs To Second Biggest Bubble Once Again

Toronto real estate is climbing up the charts, and is back to the second highest risk for a bubble. This is up from the number three spot it held in 2018, but down from topping the list in 2017. The firm notes prices are largely unchanged from last year, but prices tripled from 2000 to 2017. They estimate a 650 sqft apartment now costs 25 years worth of rent, up from 16 years just a decade ago.

UBS - Global Real Estate Correction Phase Emerging, Toronto Climbs Bubble List - Rank

Source: UBS Global Real Estate Bubble Index.

Vancouver Real Estate Falls To Sixth Biggest Bubble

Vancouver real estate fell to the sixth highest market on the global bubble list. This is down from the fourth spot, which it held for the past two years. The first noted a price drop of 7% helped to correct things. However, real home prices in the city still remain over 75% above where they were 10 years ago. It would take 29 years of rent to pay for the equivalent 650 sqft apartment. This is up from the 20 years it would have taken, just 10 years ago.

UBS - Global Real Estate Correction Phase Emerging, Toronto Climbs Bubble List - Price Change

Source: UBS Global Real Estate Bubble Index.

Global real estate markets are seeing rates fall across the board, and prices deflate. Traditionally lower rates lead to more favorable financing, and higher prices. More favorable financing isn’t enough right now, as economic anxiety hits ahead of a possible global downturn.

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23 Comments

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  • Yan 2 months ago

    Sorry, but how do falling rates not create higher prices? If it’s cheaper to finance, people will spend more on their homes (often the same size).

    • Trader Jim 2 months ago

      Long story short, demand stimulus like lowering rates and first-time buyer programs, brings demand forward. That is, people who weren’t ready to buy, get a nudge of more money to buy.

      The problem is you can only bring so much demand forward, before you’re reaching too far back. Since you’ve borrowed demand from previous cohorts, even at peak, the cohort isn’t large enough.

      You know how debt is spending your future income in the present? Using more debt, you can spend your future buyers now. It creates long-term structural imbalances. Great if you’re selling today. Not so much if you’re selling tomorrow.

      • RainCityRyan 2 months ago

        Thanks Trader Jim for the reminder that all debt is consumption pulled from the future to today (I honestly do forget this on occasion).

        I’ve posted this before, but for anyone wondering how it all works, Ray Dalio has provided an excellent guide to debt and how the economic machine works:
        https://www.youtube.com/watch?v=PHe0bXAIuk0

        Take a couple min and have a look (in fact I’m going to re-watch now), it’s available in many languages and is super easy to follow. It’s truly the underpinnings of the economic system.

    • Smaug 2 months ago

      Rates fell drastically from 1990 to 1993. Guess what else fell. Real estate prices.

    • Mike 2 months ago

      Thanks Ethan for the info.Sorry have three boys 16-20 and they are already being told by their teachers that they won’t own a house and rents are sky high.Future does not look good.

      • Neo 2 months ago

        Mike,

        16-20 year olds in the late 80’s were told the same thing. GTA peaked in 1989-90 and didn’t nominally get back to those levels until 2002 when those 16-20 were now 28-34 and looking to buy at a time when incomes finally caught up to the pricing. ie. fundamentals and homes were actually affordable. History will repeat itself again for your kids. You always eventually revert back to the mean. Conditions are worse now though in terms of the conditions heading into this correction.

      • SH 2 months ago

        You can thank mass immigration for that.

    • Joseph 2 months ago

      It’s all about supply and demand. That’s always what it comes down to.

      Lower interest rates brought future buyers into the present, as Trader Jim mentioned.

      It’s all a balancing act in the end. High rates + low house prices versus low rates + high house prices.

      What this increase in house prices did, so quickly, was potentially give people who otherwise wouldn’t have it, a giant increase in wealth. Real estate agents capitalized (I’m pretty sure a cat could have sold a ton of houses over the last 10 years). A lot of wealth should have potentially accumulated.

      I guess we’ll see if either the home owners or realtors saved any of their money or put their new found wealth to good use when the economy tanks.

  • Ahmed 2 months ago

    Better pick up some popcorn, because this China-US meltdown is going to be awesome.

  • Mike 2 months ago

    Cheap money drives up assets we know this from last 9 years and big time over last 5 years.Bank telling us don’t worry lower rates will not ballon house prices.What else do you think banks would say.Only one party is going to go after the route problem with housing crisis.Only one.Canada

    • Ethan Wu 2 months ago

      Banks actually say the opposite. This is a global research investment bank, it’s very different from someone selling you a mortgage.

      There’s a comment above that explains the issue well.

    • george 2 months ago

      which party is that?

      • Mike 2 months ago

        No chance to win NDP

      • John 2 months ago

        I’d like to know too. I’ve only seen more gasoline promises.

      • Mike 2 months ago

        NDP
        Foreign buyers tax
        Going after dirty money
        Not removing stress tests

  • WorldClassCitizen 2 months ago

    I’m beginning to believe the bulls. Prices in Toronto don’t seem to be going down, how many warnings have we received over the last three years of Toronto being in bubble territory. But that bubble never pops and I’m beginning t think it never will.

    • Neo 2 months ago

      We haven’t had a real recession since the early 90’s. We never got the nasty 2008 one the US got becuase we floored interest rates and inflation a housing bubble. The recession is going to be bad this time around.

  • Asterix1 2 months ago

    Canadians are truly being left out in the dark when it comes to Real estate shifting position.

    In Canada: Mainstream newspapers are completely dependent on the money coming in from Big Realty and Big Banks. They will publish pretty much anything without analyzing or debating it. Its mostly junk articles written in the Communication departments of these players, to be distributed to the public. You also get banks and their “economists” blabbing about stuff that they clearly have no idea what they are talking about.
    The consensus is pretty clear: Keep buying, prices will always go up.

    Outside Canada: World media cannot be bribed by our local players. Mostly articles pointing to the fact that things have slowed down and huge bubbles are present in Canada. Banks and research institutes keep pointing that Canada is in a bubble. Massive debt and prices are actually falling
    The consensus is pretty clear: Its a hot potato, don’t buy, prices are actually falling.

    I feel bad for anyone trusting bank economists, realtors, builders, mortgage brokers and the rest of the lot!

  • Ace 2 months ago

    It is climbing in some areas on Toronto but along the outskirts many areas have fallen. I’ve been watching the market very carefully and motivated sellers are dropping their prices drastically while the ones who don’t need to or can’t sell are either taking their houses off the market or renting them out instead.
    There has definitely been a big change. Rather than houses selling immediately like they were in 2016-17 they are sitting on the market for months, some of them maybe getting only one viewing a weekend if they’re lucky. Also noticing Zolo has hidden some data on houses that are trying to sell again in 2019 who purchased in 2016-17. Fishy stuff going on.

  • Snarky 2 months ago

    I just want to know when the surrounding areas to Toronto i.e. 905 become world class cities as well to qualify for huge price jumps. Is now being world class adjacent good enough? Or is it more like a pandemic that spreads? Please if anyone can explain the phenomenon????

  • JC 2 months ago

    All they have to do is return those vacant homes to the Canadian. Make a law and take out the foreigners from owning a home in Canada and forces the foreigners to sell the property within a year otherwise we will take your home and liquidate into the market. That will increase the home supply and drive down the housing price. That’s all you need to do Canadian Government!

    • Joseph 2 months ago

      Actually, all Canada needs to do is implement a system like Duproprio in Quebec. That’s where Quebecers buy/sell their homes and it takes out the middleman (realtors).

      Purple Bricks is still ages behind Duproprio in Canada. Canadians would be better off with it (throughout the country).

      • JC 2 months ago

        That’s not enough because a lot of homes are already purchased by foreigners. Need to enforce a law to prevent foreigners owning a home in Canada just like Mexico did.

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