Toronto condo market is in 'high risk zone' of overbuilding, RBC says

Canada's biggest bank has sounded the alarm about overbuilding in Toronto's condo boom, saying the level of new units coming online coupled with the existing ones that are yet to sell have the market in 'high risk' territory.

Royal Bank says glut of new units may combine with unsold existing ones to cause a problem later

The level of condo construction in Toronto is at a historically high level, Royal Bank says. (Aaron Harris/Reuters)

Canada's biggest bank has sounded the alarm about overbuilding in Toronto's condo boom, saying the level of new units coming online coupled with existing ones that are yet to sell have the market in 'high risk' territory.

In a report Friday, economists Robert Hogue and Craig Wright wave a red flag about activity in the condominium segment in many cities, but single out Toronto with being especially problematic.

In the first quarter of 2016, there were almost six new condo units under construction across the country for every 1,000 people, just off an all-time high hit in 2014. "This level is well into the high risk zone," the bank says, which it defines as anything about 4.5 condos under construction per 1,000 people.

The bank credits most of the surge in the national figure with the Toronto market, where condo construction now makes up one-third of all types of new home construction.

So far, the booming market in Canada's largest city has been able to absorb all those new units, as there's still strong demand for housing in the downtown core. Should that change down the line, the sheer volume of new units will cause problems in the entire market.

"High levels of construction entails the risk that many units may reach the completed stage at once, thereby flooding the condo resale and/or rental markets," the bank said.

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Those new units come on top of a glut of existing unsold condos, which have inched up to concerning levels in recent months.

As this chart from Royal Bank's report shows, the level of condo construction in Toronto has come down from recent highs but is still in the range that the bank considers problematic. (Royal Bank of Canada)

In Toronto, the amount of unsold but finished condos fell from a 22-year high of 0.58 units per 1,000 population in May 2015 to 0.28 units in April 2016, but both figures are still in the range the bank calls "modest excess supply" which is anything  between 0.27 and 0.42.

The bank looked at segments of the housing market all over the country, and, all in all, found little of concern. But the condo market was singled out for being a possible danger in every major city the bank looked at, including the four biggest housing markets of Toronto, Vancouver, Montreal and Calgary.

While Toronto was deemed the biggest threat, the bank said the sheer volume of condos coming down the pipeline could pose problems in almost every market.

"The prospects for high levels of condo completions in the period ahead in markets such as Toronto, Montreal and Calgary maintain above-average absorption risks," Royal Bank said.