Mortgage rate increases are scaring away new buyers and house prices in many countries are hitting all-time highs. This is coming at a time when real growth in wages is stagnating, adding a further hurdle to those wanting to set foot on the property ladder. These factors are combining to add an aura of fragility to big city housing markets across the world. 

A new report by UBS shows that Toronto in Canada has the highest risk of a housing bubble of any large city in the world. 

According to the report, nominal house price growth in the cities analysed “accelerated to 10% from mid-2021 to mid-2022, representing the highest increase since 2007”, with four US cities – Miami, Los Angeles, San Francisco and Boston – among the top five with the fastest-growing prices. Israel’s Tel Aviv comes in fourth place. 

The analysis shows that mortgage rates have almost doubled on average across the cities, which, coupled with an increase in prices, has made city housing even less affordable for first-time buyers. The report points out that “a skilled service sector worker can afford roughly one-third less housing space than before the pandemic”.

Housing market price corrections have already begun

A mix of “higher interest rates, inflation, turmoil in the financial markets and deteriorating economic conditions are putting the housing boom under pressure”, says the report, with price corrections already starting in a majority of cities with high valuations, or expected to begin in the coming quarters.

Toronto tops the ranking, with property price growth in the city accelerating to its highest rate in five years. House prices in the city are now 17% higher than a year ago.

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The second-placed city in the ranking is Frankfurt in Germany, which had experienced double-digit percentage house price rises, although these high figures have started to come down in recent months. However, the report explains that “the recent cooling masks a stunning rise: Frankfurt’s nominal housing prices are currently still more than 60% above their levels five years ago. In this period, price growth has significantly outpaced income and rental growth in a major decoupling from fundamentals. Investment demand has played a crucial role in driving up prices.” This leaves the city in bubble risk territory.

London sits in 15th place in the ranking, having experienced a strong rebound in average market rents over the past year “as some would-be buyers fail to find suitable properties and business tenants return after the pandemic”, according to the report. The risk of a real estate bubble in the city has slightly decreased compared with a year ago, according to the UBS research, but still “leaves the housing market in overvalued territory”.

Globally, the ever-spreading cost of living crisis is translating into a bleak outlook for workers looking to purchase their first property, made even worse by rents hiking and inflation increasing while wages do not follow suit. However, as the report states, the picture is quickly changing, making the near future uncertain for both property markets and buyers.