“If the upcoming supply of units is not absorbed by demand as they are completed over the next 12 to 30 months, the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity,” states the report.
The warning is contained in the latest review of the country’s financial system by the Bank of Canada, as it singles out the Toronto condo market in particular as carrying a high level of unsold high-rise units in the pre-construction or under construction stages.
The report specifically fears a domino effect throughout the housing market unless the current glut of inventory in GTA condos is absorbed.
“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations,” reads the report.
Worse, the Bank fears that such a ripple effect could hit loan portfolios overall.
“These adverse effects would weaken the credit quality of bank’s loan portfolios and could lead to tighter lending conditions for household and businesses,” warns the report. “This chain of events could then feed back to the housing market, causing the drop in house prices to overshoot.”
Despite the dire warnings, the Bank’s semi-annual analysis -- the first under its new governor -- does state that the risks posed to the financial system have lessened, so long as borrowing costs remain at low levels. It also expects that the current correction in housing will continue to go smoothly, despite the current risks.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate