“The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” - UBS
Last week UBS released its 2017 Global Real Estate Bubble Index. At the top of the list was none other than Toronto, followed by Stockholm, Munich, Vancouver and Sydney. And at the bottom of the list was Chicago – a city that UBS feels is undervalued.
Here is the full list of index scores:
The UBS index is a weighted average of the following five sub-indices:
Price-to-income
Price-to-rent (fundamental valuation)
Change in mortgage-to-GDP ratio
Change in construction-to-GDP ratio (economic distortion)
Relative price-city-to-country indicator
If you look at their price-to-income benchmark in isolation, Toronto drops down to the middle of the pack along with Geneva and San Francisco. Hong Kong, London and Paris sit at the top with the most unaffordable housing.
Still, UBS credits “an overly loose monetary policy”, foreign demand, tight zoning, and rental market regulations for the eroding housing affordability in Toronto and Vancouver.
One of the challenges, of course, is that the capital flowing into real estate is not all local – it’s also global. And many cities around the world are seeing high price-to-income multiples, perhaps because of that.
So exactly how much decoupling from local fundamentals should now be considered reasonable in our globalized world? And to what extent is this a result of “superstar economics?”
Here’s an excerpt from the UBS report:
The economics of Superstars explains why, in some professions, show business for instance, “small numbers of people earn enormous amounts of money and dominate the activities in which they engage.” By analogous reasoning, prices in the most attractive cities are expected to outperform average cities or rural areas in the long run. Hong Kong, London and San Francisco are exemplars of this theory.
The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level.
I guess this is one of the reasons why bubbles are proven after the fact. If you would like to download a copy of the full UBS report, click here.
There’s no shortage of talk about a Canadian housing bubble:
In Vancouver, the price of a single-family home (as of June of this year) increased
“The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” - UBS
Last week UBS released its 2017 Global Real Estate Bubble Index. At the top of the list was none other than Toronto, followed by Stockholm, Munich, Vancouver and Sydney. And at the bottom of the list was Chicago – a city that UBS feels is undervalued.
Here is the full list of index scores:
The UBS index is a weighted average of the following five sub-indices:
Price-to-income
Price-to-rent (fundamental valuation)
Change in mortgage-to-GDP ratio
Change in construction-to-GDP ratio (economic distortion)
Relative price-city-to-country indicator
If you look at their price-to-income benchmark in isolation, Toronto drops down to the middle of the pack along with Geneva and San Francisco. Hong Kong, London and Paris sit at the top with the most unaffordable housing.
Still, UBS credits “an overly loose monetary policy”, foreign demand, tight zoning, and rental market regulations for the eroding housing affordability in Toronto and Vancouver.
One of the challenges, of course, is that the capital flowing into real estate is not all local – it’s also global. And many cities around the world are seeing high price-to-income multiples, perhaps because of that.
So exactly how much decoupling from local fundamentals should now be considered reasonable in our globalized world? And to what extent is this a result of “superstar economics?”
Here’s an excerpt from the UBS report:
The economics of Superstars explains why, in some professions, show business for instance, “small numbers of people earn enormous amounts of money and dominate the activities in which they engage.” By analogous reasoning, prices in the most attractive cities are expected to outperform average cities or rural areas in the long run. Hong Kong, London and San Francisco are exemplars of this theory.
The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level.
I guess this is one of the reasons why bubbles are proven after the fact. If you would like to download a copy of the full UBS report, click here.
There’s no shortage of talk about a Canadian housing bubble:
In Vancouver, the price of a single-family home (as of June of this year) increased
In an effort to stop prices from running away even further, I am sure you all know that the BC government has recently imposed an additional 15% transfer tax on Metro Vancouver homes purchased by foreign buyers (people who are not Canadian citizens or permanent residents).
The data that I have seen (here and here) suggests that foreign buyers could make up somewhere around 5-10% of the market. Given that many will now get creative in terms of hiding their foreignness, I am not so sure this new tax will have a dramatic impact on affordability. But it certainly sounds nice if you’ve been grouchy about home prices and thinking “those damn foreigners.” We’ll have to see how it plays out.
Having said all of this, if Vancouver is in fact in bubble territory, would that be so bad? Are we thinking about this the right way?
Here’s an alternative viewpoint.
I recently stumbled upon an old blog post by Tom Evslin (2005) called: Why we need bubbles. I discovered it via it Fred Wilson. Tom’s argument is that we need irrational exuberance because it provides the capital that allows for dramatic overbuilding. The overbuilding of things like rail infrastructure, internet infrastructure and – I’m adding this – housing infrastructure. And once this happens, it dethrones the incumbents and paves the way for future economic progress.
Tom’s focus is on technology, but I couldn’t help but think of the parallels with city building. Is the proposed Rail Deck Park in Toronto so bold that it’s only possible during a period of irrational exuberance? Should Vancouver instead be working to dramatically expand its housing supply instead of trying to tax away a portion of demand? Is a period of irrational exuberance precisely the moment where we lay the ground work for our future successes?
I’m not saying we’re in a bubble. I don’t believe in or know how to time markets. But I am asking whether the bubble headlines are missing the greater opportunity.
In an effort to stop prices from running away even further, I am sure you all know that the BC government has recently imposed an additional 15% transfer tax on Metro Vancouver homes purchased by foreign buyers (people who are not Canadian citizens or permanent residents).
The data that I have seen (here and here) suggests that foreign buyers could make up somewhere around 5-10% of the market. Given that many will now get creative in terms of hiding their foreignness, I am not so sure this new tax will have a dramatic impact on affordability. But it certainly sounds nice if you’ve been grouchy about home prices and thinking “those damn foreigners.” We’ll have to see how it plays out.
Having said all of this, if Vancouver is in fact in bubble territory, would that be so bad? Are we thinking about this the right way?
Here’s an alternative viewpoint.
I recently stumbled upon an old blog post by Tom Evslin (2005) called: Why we need bubbles. I discovered it via it Fred Wilson. Tom’s argument is that we need irrational exuberance because it provides the capital that allows for dramatic overbuilding. The overbuilding of things like rail infrastructure, internet infrastructure and – I’m adding this – housing infrastructure. And once this happens, it dethrones the incumbents and paves the way for future economic progress.
Tom’s focus is on technology, but I couldn’t help but think of the parallels with city building. Is the proposed Rail Deck Park in Toronto so bold that it’s only possible during a period of irrational exuberance? Should Vancouver instead be working to dramatically expand its housing supply instead of trying to tax away a portion of demand? Is a period of irrational exuberance precisely the moment where we lay the ground work for our future successes?
I’m not saying we’re in a bubble. I don’t believe in or know how to time markets. But I am asking whether the bubble headlines are missing the greater opportunity.
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