The Swiss-based investment firm's global real estate outlook shows concerns for Canadian cities among those with elevated risk
Real estate investors are facing pressure from rising interest rates with some markets posing elevated risk according to UBS Global Wealth Management's Chief Investment Office.
The Switzerland-based asset manager has published its Global Real Estate Bubble Index which names Toronto and Frankfurt as the most elevated risk on housing markets.
The analysis of 25 major cities’ housing markets also notes above-average risk for Vancouver, Zurich, Munich, Hong Kong, Amsterdam, Tel Aviv, and Tokyo.
The index focuses on housing markets where prices are out of sync with rising interest rates. It found nominal house price growth in all of the 25 cities analyzed accelerated to almost 10% on average from mid-2021 to mid-2022. This is the highest yearly growth rate since 2007.
It also revealed an acceleration in the growth of outstanding mortgages in most cities and household debt growing significantly faster than the long-term average.
For Toronto and Vancouver, the index has highlighted concerns in the last couple of years and the most recent price surge – of 35% since the pandemic – is unsustainable. UBS notes that prices are already moderating due to the Bank of Canada’s rate hikes.
Labour market support
Although income rises and rents have increased across the analyzed cities, providing support for the price rises of an average of 60% in inflation-adjusted terms during this period, it is the strong labour market that had been particularly beneficial.
However, with mortgage rates more than doubling on average across the 25 cities, there has been a reduction in the amount of living space that is affordable even for a highly-skilled service worker.
“Inflation and asset losses due to current turmoil in the financial markets are reducing household purchasing power, which curbs demand for additional living space,” said Claudio Saputelli, head of real estate at UBS Global Wealth Management’s Chief Investment Office. “Housing is thus also becoming less attractive as an investment, as borrowing costs in many cities increasingly exceed the yields of buy-to-let investments.”
Unaffordability in cities such as Toronto and Vancouver means that the supportive influence of the labour market on owner-occupied housing is at risk of faltering.
“Indeed, we are witnessing the owner-occupied housing boom finally under pressure globally, and in a majority of the highly-valued cities, significant price corrections are to be expected in the coming quarters,” concluded Matthias Holzhey, lead author of the study at UBS Global Wealth Management.
