The surge in interest rates and the rapid increase in inflation have contributed to mitigating the housing bubble risk in Toronto. Nevertheless, the real estate market in the city remains significantly overpriced.
In the recently released UBS Global Real Estate Bubble Index for 2023, Toronto secured the seventh spot with a score of 1.21. This annual index evaluates the housing markets of 25 selected cities worldwide based on their vulnerability to a housing bubble. Cities with scores falling between 0.5 and 1.5 are considered overvalued, while scores exceeding 1.5 indicate a risk of a housing bubble.
The 2023 Index identified only two cities as being at risk: Zurich (1.71) and Tokyo (1.65). This marks a substantial decrease from the previous year when nine cities were categorized as bubble risks. In 2022, Toronto scored a high 2.24, making it the second-most vulnerable housing market globally.
The UBS report highlights the significance of low financing costs in driving up home prices in the past decade. However, the sudden termination of the low-interest rate era has disrupted this upward trajectory.
Data from the Toronto Regional Real Estate Board reveals that between March 2019 and March 2022, the average home price in Toronto surged by more than 64%, while interest rates plummeted from 1.75% to 0.25%. Yet, starting in March 2022, the Bank of Canada (BoC) began gradually increasing interest rates, which now stand at 5%. By February 2023, when interest rates were still at 4.5%, prices had fallen by nearly 18%, and sales had slumped by over 40%.
The report explains that in a hot market, sentiment can change rapidly. The combination of rising financing costs and higher mortgage stress test rates tipped the scales, causing the risk of a housing bubble in Toronto to dissipate. However, the market remains situated in an overvalued state. Rather than disappearing, the pressure has shifted to the rental market, with prices rising over the past year.
When the BoC temporarily halted rate hikes in the spring, Toronto’s housing market swiftly displayed signs of recovery. Prices increased by approximately 8% in just two months, while sales saw a 30% boost.
The report concludes that it may be premature to anticipate a market turnaround, especially with the possibility of further interest rate increases. Nevertheless, given the persistent demand, low supply, and diminishing construction levels, the groundwork for the next property price surge has already been laid.
