Bank of Canada: Toronto’s condo boom a big risk to the country’s financial health

Toronto's Never Ending Condo Apartment Boom Flickr Photo by Canadian PacificThe Bank of Canada is still feeling nervous about Toronto’s real estate boom. The former head of the central bank, Mark Carney, had a long history of sounding the alarm over too much building and that message hasn’t changed in the bank’s latest review of the country’s financial system.

The bank singled out the big city’s big condo market specifically, noting, “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.”

There’s concern a volatile market could spur a negative feed-back loop where plummeting prices would damage households’ net worth, bring down consumer confidence and spending and effect income and job creation as well.

“These adverse effects would weaken the credit quality of banks’ loan portfolios and could lead to tighter lending conditions for households and businesses. This chain of events could then feed back into the housing market, causing the drop in house prices to overshoot,” the report went on to say.

Other ifs that could cause the market to experience a sharp correction: the vulnerable financial system in the Euro zone and rising interest rates at home.

The bank tempered some of these concerns by saying that there are some encouraging signs with resale activity levelling off after dropping from historically high levels, moderating housing starts and less evidence of runaway price appreciation in the country’s bigger metros.

Despite these encouraging developments, concerns remain, largely because of the spectre of overbuilding and pumped up housing valuations. The risks associated with debt and housing market imbalances may have decreased but there’s still enough of a threat that the risk remains within the “elevated” category.

Here are some of the charts the bank included in the report…

Bank of Canada Toronto Condos

 

Bank of Canada household income