Real estate overlooking Granville Island is seen in downtown Vancouver.Rafal Gerszak/The Globe and Mail
Vancouver has edged out London to top a global list of markets facing the greatest risk of having their housing bubbles burst.
Under a formula devised by Swiss bank UBS AG, Vancouver ranked No. 1 with an index score of 2.14. London, which led the list in 2015, placed second this year with a score of 2.06 on the UBS global real estate bubble index.
UBS said four other major world centres have inflated real estate values seen to be in the bubble category – Stockholm, Sydney, Munich and Hong Kong. Last year, London and Hong Kong were in bubble territory, followed by "overvalued" Sydney and Vancouver.
Read more: What you need to know about real estate reform in B.C.
Vancouver managed to weather the global financial crisis of 2007-09 and watch its housing market climb to new heights, before sales softened in recent months and average prices in August fell year over year.
"Vancouver's housing market has not been dragged down by either the financial crisis or weakening commodity prices. The index has signalled a significant overvaluation since 2007," UBS said in a report released Tuesday. "Over the last two years, the housing market has gone into overdrive due to strong demand for local properties among foreign investors and a loose monetary policy. Currently, house prices in Vancouver seem clearly out of step with economic fundamentals and are in bubble risk territory."
UBS, which looked at 15 selected markets last year, added Stockholm, Munich and Milan in this year's survey of 18 global centres.
Within the City of Vancouver, the price for detached houses sold in August averaged $2.6-million. In Greater Vancouver, which includes suburbs such as Burnaby and Richmond, the price for detached houses, condos and townhouses sold last month averaged $833,065.
Low interest rates and a weakened Canadian dollar appear to have helped stimulate demand from Asia since late 2014, UBS said.
The B.C. government implemented a 15-per-cent tax on purchases by foreign buyers in the Vancouver region on Aug. 2.
Early data from the B.C. government show the number of foreign buyers in the Vancouver area's housing market dropped in the first month of the tax, although some of that was due to a rush to close transactions before Aug. 2, including deals that involved buyers from China. Of the total number of transactions, the proportion of foreign purchasers who closed their deals to buy homes in the Vancouver region was 0.9 per cent between Aug. 2 and Aug. 31, down from 13.2 per cent in the seven weeks leading up to Aug. 2.
UBS lists seven cities in the overvalued category (scores between 0.5 and 1.5) but not so overheated to be in the bubble grouping: San Francisco, Amsterdam, Zurich, Paris, Geneva, Tokyo and Frankfurt.
"The term bubble refers to a substantial and sustained mispricing of an asset," the report said. "Typical signs are a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity."
The Swiss bank sees Singapore, Boston, New York and Milan as fairly valued, while listing Chicago as undervalued.
The formula for determining index scores includes examining ratios such as price-to-income and price-to-rent, how a specific residential market compares with the country, as well as studying mortgage and construction data relative to gross domestic product.
"When combined with rigid supply, as well as sustained demand from China, this has produced an ideal setting for excesses in housing prices," according to UBS.
Brent Jang