How is this for a follow-up on Monday’s blog?

The timing is perfect.

There was no shortage of articles earlier this month about annual “UBS Global Real Estate Bubble Index,” which is published every year around this time, but most articles leave me disappointed, to be quite honest.

Like this article, for example, from the Financial Post: “Toronto Is Now The World’s Second-Most Overvalued Property Market: UBS”

Not only is this article a meagre 565 words, but I also don’t love the conclusion drawn: that Toronto is the second-most “overvalued” property market.

Is that what this article is saying?

Because UBS refers to this as a “Bubble Index” and that’s something different.

Without getting too cynical here, let me just tie this back to Monday’s blog post.  On Monday, we looked at whether so-called “fundamentals” were accurate in predicting future market events, or even explaining past market events, as a couple of academics tried to do, unsuccessfully.  We discussed whether data that “should” point to A, B, or C happening in the market place is at all accurate, and whether or not there’s a higher or lower chance that it ends up pointing at X, Y, and Z.

So let me throw you another bone here and ask if a “bubble index” is the same thing as suggesting a market is “over priced.”

Personally, I think these are two different things.

Labelling a market within a “bubble” seems to infer that it’s going to pop.  A “bubble index” would then be a list of properties that are sequenced in order of pending doom.

Referring to a market as “overpriced” doesn’t, in any way, infer that the market is going to “pop.”

Once again, I feel like all the newspapers got this one wrong, as is so often the case, since they merely chose a sexy headline without giving two seconds worth of thought to how the headline tells the actual story.

And if we tie this back to Monday’s discussion, can we really make a claim that a market is “overpriced” just because it’s expensive?

Is a Louis Vuitton handbag overpriced?  I think it is, but that’s my opinion.  I’m frugal, and I don’t see value here.

And what if real estate keeps its value, and continues to rise thereafter?  If a condo is “overpriced” at $500,000, because it’s worth far more than standard market fundamentals would otherwise have us believe, then what do we call it when it’s worth $600,000?  And then $700,000?  And then $800,000?

That seems to be the theme in the annual UBS Bubble Index, where the same cities, over and over, are ranked.  And when real estate in these cities continues to appreciate, then the rankings seem a bit silly.

This year, as the newspaper headlines tell us, the city of Toronto ranked #2 in the world on the bubble index, which, as discussed above, may or may not mean it is also the #2 most “overpriced” in the world.

You must be a subscriber to get the full report, but HERE is a link to a pdf that I think you can access regardless of subscription status.

Here’s the full list of cities analyzed in 2019:

The report notes:

The greatest risk of a real estate bubble currently exists in Munich, followed by Toronto, and Hong Kong and Amsterdam.

On the whole, the report explains:

On average, in the cities analyzed, inflation-adjusted price increases have practically come to a standstill in the last four quarters.  REsidential property only appreciated markedly in Moscow, Boston, and the cities in the Eurozone.  Frankfurt was the only city to see double-digit price increases, which were common globally in previous years.  By contrast, there were corrections of over 5 percent over the previous year in Sydney, Vancouver, and Dubai.  New regulatory measures and lower economic growth globally have hit prices in the owner-occupied housing markets.  The more overheated a market, the easier it is to trigger a correction.

Despite the worldwide collapse in interest rates, the negative trend in home prices will probably continue.  Mortgage rates in many cities had already ceased to be the bottleneck in recent years when it came to buying a home.  Rather, many households lack the funds required to buy a home or meet banks; financing criteria.  Amortization payments also tend to place a greater burden on household budgets than mortgage interest.  Furthermore economic uncertainty in a recessionary environment more than outweighs the positive contribution of falling interest rates on demand growth.

So first, what does UBS say about Toronto?

This is the basic slideshow that UBS provides on their website, but it’s enough to serve as an introduction for now.

Interesting that even as prices have risen from 2017 in Toronto’s central core (ie. the GTA average has been dragged down by the Newmarkets and Scugogs, but the 416 HPI has soared), the UBS Bubble Index has declined.

I might conclude here, as I did in Monday’s blog, that data and headlines don’t always tell the true story of the market, but I digress.

Here is the same shot for Vancouver:

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Once we dig into the full report itself, we see trendlines for Eurozone, Rest of Europe, United States, and of course, what we care about, Canada:

Again, I would point to comments as “while the average price level in Toronto has remained broadly unchanged from the past year,” as examples of how some selected data may not tell the same story as what’s actually going on in the market.

The average home price GTA-wide in September, for example, was 5.8% higher than in September of 2018.

Since this report was published on September 30th, perhaps the August data was used.  But prices were still up 3.6%, year-over-year in August.

While I recognize that the GTA is Toronto, I wonder if that’s how UBS intended to showcase their findings.

There are two interesting “benchmarks” that UBS used in their report, and once again, I would ask how relevant these are:

1) Price To Income
2) Price To Rent

They sound…….well…….fundamental in nature.

But after looking at the data, and considering relevance as it pertains to our market, you might change your tune.

Here’s how they define the first benchmark:

“In Hong Kong, even those who earn twice the city’s average income would struggle to afford an apartment.”

So what?

Why does this point to a “bubble” or to “overpricing?”

Maybe there’s a shortage of housing, too many people, a societal norm in renting, or all of the above.

“Unaffordable housing is often a sign of strong investment demand from abroad, tight zoning and rental market regulations.”

Well no kidding.

But at this point, I’m feeling like UBS is using “unaffordable” interchangeably with “bubble” and “overpriced,” and those are three different things!

Here’s the data:

Again, I would ask, “Has society decided that everybody should be able to buy, rather than rent?”  Or is this a metric merely provided for educational purposes, and comparisons from city to city?

Note that Toronto is fifth from the bottom.

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Here’s how UBS defines the second benchmark:

I’m honestly not sure what this benchmark is supposed to teach us.

I’m even less sure that it’s relevant.

Take a look at the heading of this data set:

What does this mean?

“The number of years a flat of the same size needs to be rented in order to pay for the flat.”

Why is this relevant?

It’s a metric, I get it.  But by this logic, we could come up with so many other metrics, which may or may not be helpful.

Trust me when I say that the “Methodology and Data on Page 24” did little to explain both methodology and data!  What I want to know is: if a condo currently rents for $2,200 per month, and it costs $550,000, then are we simply dividing $550,000 acquisition price or “value” by the annual rental price of $26,400, to come up with 20.8 years?  That’s my assumption, but it’s not explained anywhere, and I don’t know if it’s inflation adjusted.

Last, but not least, we have a chart that I find far, far less interesting than the last sentence of the blurb on the left:

“However, a major price correction seems unlikely in the short term, given improving mortgage conditions, a weakening Canadian dollar, and falling supply.”

So I ask you, please explain to me: what the hell is Toronto doing as the #2 city in the WORLD on a “bubble” list if the authors of the report don’t believe a price reduction is coming?

What does this all mean, exactly?

Nothing.

It means absolutely nothing.

And therein lies my issue with all of these think-tanks and analysts consistently making incorrect predictions, based on metrics, benchmarks, and indicators that they believe shape the market.

It’s quite simple, folks.  If you want to know what’s going on outside, you don’t need to Google it; just look out the goddam window…