Worried about the Vancouver housing market? According to Swiss global financial services firm UBS, maybe you should be. The latest data from its UBS Global Real Estate Index, released September 27th, shows that the city has the highest “bubble risk” in the world.
The firm defines a bubble as “a substantial and sustained mispricing of an asset,” and notes that bubbles are a recurring phenomenon in housing markets across the world. Now in its second year, the index includes data on 18 cities and is designed to track the risk of these bubbles in global financial centres — a score of above 1.5 indicates “bubble risk,” while at the other end of the scale a score under -1.5 represents a “depressed” market.
A slew of factors combined to push Vancouver to the top score of 2.14 this year. UBS notes that its housing market has been “significantly overvalued” since 2007 and kicked into overdrive at the end of 2014. Since then, real home prices in the city have increased by 25 per cent, driven upward by high demand from foreign investors and “loose credit conditions,” particularly low interest rates.
“The risk of a substantial price correction appears very elevated,” the firm says.
Aside from Vancouver, “bubble risk” is evident in five other cities worldwide: London, Stockholm, Sydney, Munich and Hong Kong. They received index scores of 2.06, 1.92, 1.7, 1.59 and 1.52, respectively. Interestingly, despite being very different cities, all five were pushed into “bubble risk” territory by circumstances similar to those seen in Vancouver — low interest rates and high demand from foreign buyers. Steady supply has also played a role.
“It is hardly any wonder that housing markets are again overheating, just a few years after the last major wave of a global correction,” UBS quips.
That said, it’s worth noting that even UBS’ most at-risk cities aren’t necessarily headed straight for house price corrections. As the firm notes, it’s impossible to conclusively prove the existence of a bubble until it pops. What’s more, “[e]ven in the cities with the clearest signs of a real estate bubble, it is not possible to predict exactly the timing and duration of a correction.”
Speaking to CBC News, Jon Woloshin, strategist at UBS Wealth Management Americas, confirmed that idea, commenting that Vancouver’s high index score doesn’t guarantee that it’s set to experience an extreme correction in housing prices. “Based on the different criteria that were factored into all these major markets, as we sit here today, Vancouver on a risk-reward basis scored the lowest, which is why it’s at the top,” he said.
However, he added that the index was put together using Vancouver data collected only as recently as this spring. That means it doesn’t take the city’s new 15 per cent foreign buyers tax into account. For Woloshin, the tax, which has already been credited with significantly reducing foreign housing deals in the city, is a bit of a wild card.
“If the government cracks down and really goes after it, yeah, I think it will have an impact,” he said, adding, “[i]f a lot of smart lawyers get involved, maybe it becomes less of an issue.” For now, he and UBS are simply urging buyers to be cautious in Vancouver and the other at-risk cities.
