The Canadian city of Vancouver tops the list of real estate markets at greatest risk of a house price bubble according to the UBS Global Real Estate Bubble Index 2016. While the term “house price bubble” indicates that this market is at greatest risk of collapse in the short to medium-term perhaps it is just a measurement of popularity? There are many other cities around the world which have attracted more than their fair share of investor interest and many of them are still “overvalued” to this day.
There is no doubt that the Canadian real estate market has benefited from a weak Canadian dollar compared to Asian currencies. This has benefited Chinese investors who are crawling over each other to get their hands on quality Canadian real estate with Vancouver one of the main attractions. In general there has been a 25% increase in house prices across Canada since 2014 which coincides with the weaker Canadian dollar.
The subject of overseas investors in the Canadian real estate market has been a hot topic of late. The authorities are looking to reduce the influence they can have on property prices and indeed there have been some suggestions of potential tax irregularities. As a consequence, the Canadian authorities are looking into ways in which they can control investment in “hotspots” and tighten the availability of funding.
Property is the best alternative?
One interesting factor of the UBS report concluded that while around 30% of all Canadian government bonds are currently offering “negative yields” an investment in real estate looks even more attractive. This is an issue which is occurring in many countries around the world, relatively low savings rates available on bank deposits and relatively high rental rates available on some properties. If you were looking at the long-term investment what would be your favoured option? Interest rates which effectively reduce the real value of your funds or long-term rental yields which can in some cases reach double digits?
The problem is that while property is obviously a major attraction at this moment in time what will happen when the markets return to “normal”. As and when interest rates finally revert to long-term levels will we see a major shift from property assets into more traditional savings vehicles?
Other bubble real estate markets
It will come as no surprise to learn that London was second place in the UBS Bubble list with Stockholm, Sydney and Munich following. As we touched on above, perhaps we should call it a popularity index as opposed to a bubble list? After all it is common knowledge that the London market has in the eyes of many experts been “overvalued” for many years.
There are some specific factors which have led many investors to look towards Canadian real estate over the last few years. As always seems to happen in popular markets, hotspots are created and Vancouver seems to be the market of choice for many investors at the moment. However, what will happen as and when worldwide interest rates return to their traditional norm?