Bank of Canada warns of risk of ‘abrupt correction’ in Toronto condo market in 12-30 months
The number of unsold units in Toronto’s high-rise projects in the pre-construction and construction phases hasn’t budged since December, the Bank of Canada said in a report released today. If those condo apartments are still without an owner when the buildings are completed 12 to 30 months from now, the BoC warned, “the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”
The CN Tower is reflected on an end table in the dining room of the Ritz Carlton residents model suite in Toronto May 1, 2012. By the end of this summer Toronto will have four projects, as Four Seasons, Ritz Carlton, Trump and Shangri-La open massive towers in a city where a red-hot market for all types of housing has brought rising concern about a real estate bubble. The granite-and-glass towers, including two of Canada’s tallest residential buildings, are opening in quick succession, adding hundreds of hotel rooms and more than a thousand condominiums just as Canadian housing hype hits a fever pitch. Picture taken May 1, 2012. REUTERS/ Mike Cassese (CANADA – Tags: REAL ESTATE BUSINESS)
Share
The number of unsold units in Toronto’s high-rise projects in the pre-construction and construction phases hasn’t budged since December, the Bank of Canada said in a report released today. If those condo apartments are still without an owner when the buildings are completed 12 to 30 months from now, the BoC warned, “the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”
Dipping condo prices, the bank continue, could trigger a market-wide reaction, the BoC said in its semi-annual review of risks to Canada’s financial system: “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.” This, in turn, might threaten the ability of some borrowers to repay their loans, leading banks to tighten credit conditions. “This chain of events,” the bank concluded, “could then feed back into the housing market, causing the drop in house prices to overshoot.”
Overall, the BoC said, household debt and the housing market remain the chief domestic threats to Canada’s financial stability. The bank maintained its December assessment that such risks remain “elevated,” though it noted that the pace at which Canadians are taking on debt has slowed considerably and is now in line with the growth rate of disposable income. Sales of existing homes have leveled off after dropping from historical highs, the BoC said, and the pace of construction of new homes has also moderated. As well, house prices in most major cities have stopped climbing.
Still, the bank remained concerned about sings of overbuilding in the Toronto condo market, an area of risk it had singled out in its December review as well, when it devoted a special section to the city’s unsold high-rise units.
The June review of the financial system was released under newly-minted Governor Stephen Poloz but most of the research and analysis underpinning it would have been conducted under former BoC Governor Mark Carney.