An overbuilt and overpriced condominium market is posing a risk to Canadian households, banks and the economy in general, the Bank of Canada warned Thursday in its latest review of the health of the country’s financial system.
The central bank particularly singles out the Toronto condo market, which it notes continues to carry a high level of unsold high-rise units in the pre-construction or under construction phases. Overall, the bank says it believes both global and Canada financial conditions have improved somewhat despite the subdued pace of the economic recovery.
In Canada, the growth in household credit has continued to slow and has fallen broadly in line with growth in disposable income, and overall activity in the housing market has moderated.
But it is still worried about the housing market, and particularly condos in Toronto.
“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,” it says.
“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations.”
That could start what it terms a negative feed-back loop. A plunge in house prices bites into net household worth, shatters confidence and consumer spending, impacting income and job creation.