The Bank of Canada is issuing among its starkest warnings to date about the country’s housing market, again taking special aim at Toronto’s condominium sector.

Bank of Canada warns of risk of ‘abrupt correction’ in Toronto condo market in 12-30 months

An overbuilt and overpriced condominium market is posing a risk to Canadian households, banks and the economy in general, the Bank of Canada warned Thursday in its latest review of the health of the country’s financial system.

The central bank particularly singles out the Toronto condo market, which it notes continues to carry a high level of unsold highrise units in the pre-construction or under construction phases.

The number of unsold units in Toronto’s high-rise projects in the pre-construction and construction phases hasn’t budged since December, the Bank of Canada said in a report released today. If those condo apartments are still without an owner when the buildings are completed 12 to 30 months from now, the BoC warned, “the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”

Dipping condo prices, the bank continue, could trigger a market-wide reaction, the BoC said in its semi-annual review of risks to Canada’s financial system: “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.” This, in turn, might threaten the ability of some borrowers to repay their loans, leading banks to tighten credit conditions. “This chain of events,” the bank concluded, “could then feed back into the housing market, causing the drop in house prices to overshoot.”

Overpriced Toronto condo market a risk to economy, says Bank of Canada

A plunge in house prices bites into net household worth, shatters confidence and consumer spending, impacting income and job creation.

The central bank says in its latest assessment of the health of Canada’s financial system that everything appears to be relatively sound at the moment but that levels of household debt and housing market imbalances pose an “elevated” level of risk to financial stability.

It warns that conditions could come tumbling down like a house of cards if any number of shocks — in Canada or the global economy — were to occur.

It singles out the Toronto condo market for special attention, saying there is a high number of unsold units in the pre-construction and under construction phases, making it particularly vulnerable to shifts in demand.

An overbuilt and overpriced condominium market is posing a risk to Canadian households, warns the Bank of Canada.

The bank says condominium prices could plunge if the supply is not absorbed as units come on stream over the next year to 30 months, which could spread to other segments of the housing market.

“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations,” it says in its semi-annual analysis. “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.”

Currently, risks to the financial system have lessened somewhat — given that borrowing costs remain at super-low levels — but the spillover effects from a sudden dip in the condo market could “weaken the credit quality of banks’ loan portfolios” and result in 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 bank’s report said.

The central bank says it still expects the correction in housing to go smoothly, but warns that any number shocks could set the process going in the wrong direction, including a hike in interest rates, a downturn in the economy and even difficulties in Europe.

Last week, the OECD singled out Canada as one of three nations in the advanced economies with the most overvalued housing market, adding that despite that elevated status, prices continue to rise.

With files from CBC News

Speculators and home buyers alike are still upbeat … ?