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The Toronto skyline is seen on Sept. 11, 2020.Fred Lum/The Globe and Mail

Toronto home prices are overvalued, making it the only North American city at high risk of being in a bubble, according to a new report on global real estate conditions by UBS.

The bank ranked Toronto as No. 3 in its annual bubble index, following Munich and Frankfurt. Seven of the 25 global cities assessed were in the high-risk category. Hong Kong, Amsterdam and Paris were below Toronto.

The report defines a bubble as being a period of a substantial and sustained mispric­ing of homes.

On the flip side, Chicago had the lowest ranking and was labelled undervalued, while Madrid, Warsaw and Milan were considered fair valued.

UBS real estate analyst, Jonathan Woloshin, said “there is a greater chance of price stagnation or price decline” in cities like Toronto than in places like Chicago. “Does that mean it will happen? No. But the risk is certainly greater,” he said.

The UBS report stressed that it was not predicting when a bubble would burst. “Overvaluation and undervaluation can go on for quite a long period of time," Mr. Woloshin said.

But the report said a change in the economy, investor sentiment or a major increase in housing supply could trigger a decline in home prices.

The report looks at imbalances in real estate markets, including the relationship between home prices and household income. This is the fourth straight year that Toronto has been in the bank’s bubble zone, taking the top spot in 2017. Vancouver also made it to the No. 1 spot in 2016, but this year the UBS index did not classify the city as being in the highest risk zone.

Toronto’s home prices have increased, “yet affordability is already stretched,” the report said. It also said the “expected appreciation of the Canadian dollar will curb the appeal of Toronto’s property to foreign buyers when travel restrictions are lifted.”

Toronto is Canada’s second-priciest real estate market after Vancouver. After an eight-week slowdown during March, April and May, home resales and prices in Toronto have reached record highs. In August, the average prices for detached houses and semidetached houses in the city jumped more than 20 per cent to $1,505,100 and $1,166,226, respectively, compared with August of last year.

Although home resales and prices across most of the country have rebounded to prepandemic levels, the Canada Mortgage and Housing Corp. has forecast that a correction in the market could see home prices fall between 9 per cent and 18 per cent.

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