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Toronto Condominium Market Not in Bubble, Royal Bank Says

July 24 (Bloomberg) -- Toronto isn’t in the middle of a condominium bubble because record construction of new units is being matched by the demands of the city’s growth, according to Royal Bank of Canada.

The country’s largest city needs more condos because legislation aimed at restricting urban sprawl has cut the supply of new single-family dwellings, according to a report by Royal Bank Senior Economist Robert Hogue. The record 44,100 condos and apartments that the government’s housing agency said were under construction in May compares with the 38,000 new households being formed in the city each year, Hogue said.

“The historic condominium apartment boom in the Toronto-area market is not necessarily a sign of excess or of a bubble,” Hogue wrote in the report. “Unless household formation dips substantially, we would not expect the emergence of any oversupply reaching levels that would threaten the stability of the market.”

Finance Minister Jim Flaherty last month tightened mortgage rules and singled out Toronto as a place of “continuous building, without restriction.” Average home prices in the city have surged by a third from five years ago and it has more skyscrapers under construction than any city in North America.

Flaherty reduced the maximum amortization period on mortgages the government insures to 25 years from 30 years, which, along with higher interest rates and decreased affordability, may help curb demand for condos, according to the Royal Bank report. Toronto condo prices may fall by as much as 7 percent on a quarterly basis from their peak, Hogue wrote.

Possible Mismatch

The need for condos is also illustrated by the drop in the rental vacancy rate last year to 1.1 percent, the report said.

A big risk is a possible “mismatch” between the types of housing being built and demand for them, fed in part by investors who are buying units with a plan to resell them, the report said.

“The strong presence of investors in the condo market raises the risk of a mismatch among the types of units supplied and ultimately demanded for occupancy,” Hogue said in the report. “At this point, we do not equate this risk with a bubble.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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