The 'bubbliest' housing market in Canada with a median home price is $1.2 million is a grim preview of what could happen in US cities

• Canada's formerly hot housing market has rapidly cooled, especially in Toronto.
• That's because, similarly to the US, soaring home prices and mortgage rates have slowed demand.
• Canada's bubbly real estate markets is a cautionary tale for what could happen in the US. 

Canada's rapidly cooling housing ecosystem may provide clues for what's in store for its southern neighbor.

In Toronto, the country's largest housing market and ranked as the "bubbliest" by financial services firm UBS, buyer dynamics have shifted so severely that experts have ordained the city as the bubbliest in the world.

Data from UBS shows that out of 25 major cities around the world, Toronto exhibits the most elevated risk. That is because the city's house price levels have more than tripled in the last 25 years and the pandemic's home buying frenzy — which drove up costs another 35% — have significantly quelled affordability.  

As priced-out buyers put their homeownership dreams on pause, Toronto's housing activity has taken a turn for the worse.

"The index has been flashing warning signals in the last couple of years," UBS researchers wrote, adding that the latest price surge "is not sustainable."

The city's housing woes stem from an imbalance between supply and demand that has helped to drive the median home price to a staggering $1,200,494. While prices are now falling, buyers face high mortgage rates as the Bank of Canada's fight against inflation rages on. This has offset affordability gains, resulting in fewer home sales and reduced new home construction — and ultimately a housing market in disarray.

"In such overheated markets, with already very stretched housing affordability, the recent rate hikes by the Bank of Canada could be the last straw that broke the camel's back," UBS researchers said in the report.

It all sounds very familiar. 

Just like Canada, intense buyer competition and limited supply have created volatility in the US housing market. Matters have only worsened as the Federal Reserve — much like the Bank of Canada — attempts to bring the overall economy in equilibrium. 

Their efforts have led to several rate hikes that have pushed up mortgage rates significantly. Data from Freddie Mac shows that the average rate on a 30-year fixed-rate mortgage climbed to 6.92% last week — reaching the highest level since April 2002. 

"The uncertainty and volatility in financial markets is heavily impacting mortgage rates,"

Sam Khater, the chief economist at Freddie Mac, told Insider, adding that "the range of weekly rate quotes for the 30-year fixed-rate mortgage has more than doubled over last year."

"This means that for the typical mortgage amount, a borrower who locked- in at the higher end of the range would pay several hundred dollars more than a borrower who locked-in at the lower end of the range," he said. 

The higher mortgage rates rise, the fewer Americans are purchasing homes. Data from the MBA shows that the number of mortgage applications has fallen in 14 out of the last 20 weeks, highlighting a downturn in homebuyer activity. 

With less demand from buyers, similarly to Canada, new home sales and home construction is slowing in the US. "The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability," Khater said. "As a result, over the rest of the year purchase demand will likely continue to drag, supply will modestly increase, and home price growth will decelerate."

The US housing market is becoming increasingly cold. While it has yet to reach bubbling levels, economic volatility could escalate its downturn. With more interest rate hikes poised for 2022, that may mean the US and Canada could eventually share more than a border.