Toronto, Vancouver Housing Vulnerable, Economists Warn

Toronto’s condominium market is showing signs of overbuilding, says an economist at the city’s largest university, while Royal Bank of Canada says Vancouver housing is vulnerable to a “marked correction.”

Construction of new units in Toronto has accelerated compared with population growth, said Peter Dungan, an associate economics professor at the University of Toronto. Dungan made the comments in a forecast of the Ontario and Canadian economies.

Ontario multiple-unit housing starts jumped at annualized rate of 50 percent in March, the federal housing agency said April 11, taking the pace of national construction to the highest since 2008. Bank of Canada Governor Mark Carney said yesterday near-record consumer debt is the economy’s biggest domestic risk and some housing markets have “firm” valuations.

“You just wonder at some point if you aren’t overbuilding,” Dungan said in a telephone interview yesterday. “Even more than at the national level, the Ontario housing numbers are really starting to concern us,” he said in his report, adding Toronto condo starts were “off the charts.”

Residential construction in Ontario will grow 5.7 percent this year, then decline at rates of 1.3 percent in 2013 and 0.9 percent in 2014, according to Dungan’s forecast. The province’s economic growth will accelerate from 2 percent this year to 2.2 percent next year and 2.9 percent in 2014.

‘Doom and Gloom’

“Some of the gloom and doom about housing we think is overdone but there is a certainty a lot of smoke even if there isn’t fire,” Dungan said.

Canadian Finance Minister Jim Flaherty introduced legislation legislation today that creates a registry for companies that sell covered bonds and prohibits sellers from using insured mortgages as collateral.

Any corrections in housing markets “will be localized as opposed to something universal,” Dungan said.

Young families who haven’t lived through a period of high interest rates could be at the most risk, he said.

“The warning signals have been going out,” Dungan said. “It’s hard to know how that message is getting through to people.”

While resales and prices have declined in the greater Vancouver area, Royal Bank of Canada (RY) said the country’s priciest housing market remains vulnerable to a correction.

“With affordability, or rather unaffordability, having moved off the scale in the past three to four years, the historically volatile Vancouver-area market is undoubtedly under substantial stress,” Robert Hogue, a Toronto-based senior economist at Royal said in a note to clients. “It is vulnerable to a marked correction.”

Measured Decline

The most likely scenario is for prices to decline 7 percent to 12 percent from their quarterly peak to trough over the medium term, which Royal said would be “taken in stride by the market.”

Hogue forecast a measured decline because previous strong gains were overstated by average price data, there are few signs of imbalance between demand and supply and he expects the market to remain well supported by a fairly favorable economic environment and strong demographic fundamentals.

Still, risks remain, such as a possible reversal of investment from abroad, including China, Hogue said.

To contact the reporter on this story: Greg Quinn in Ottawa at

To contact the editors responsible for this story: Chris Wellisz at; David Scanlan at

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