The Bank of Canada released their Financial System Review today which noted that “the risks associated with high levels of household debt and housing market imbalances have decreased, but remain within the elevated category.”
Here are some of the key highlights:
“In some market segments, housing valuations remain stretched, and there continue to be signs of overbuilding. These imbalances, which built up over many years, will take some time to correct. While a gradual unwinding of imbalances is expected, there is a risk of a sharper correction.”
“Recent developments in the housing market have been encouraging and broadly in line with the Bank’s base-case outlook, which calls for a gradual unwinding of imbalances in that sector. Nonetheless, simple indicators continue to suggest some overvaluation in the housing market: house prices are high relative to income (Chart 18), and housing affordability could become a concern when interest rates begin to normalize (Chart 19).”
“Construction activity remains strong in some segments of the
market (despite the slowdown in overall housing demand over the past year), and the total number of housing units under construction remains significantly above its historical average relative to the population.”
The Toronto condo market was called out specifically, but with effects that would spill over:
In the Toronto condominium market, the number of unsold high-rise units in the pre-construction and under-construction stages has remained near the high levels observed since early 2012.
If the investor component of demand has boosted construction in the condominium market beyond demographic requirements, this market may be more susceptible to shifts in buyer sentiment
Furthermore, 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.
Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations.
You can download the entire 65 page report: here