OTTAWA -- An overbuilt and overpriced condominium market is posing a risk to the economy, 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 units in both pre-construction and under-construction phases.
It urges policy-makers to continue monitoring developments in the sector, saying it is "working closely" with federal authorities to maintain an ongoing assessment of risks.
Overall, the bank says it believes financial conditions globally and in Canada have improved despite the subdued pace of the economic recovery.
In Canada, the growth in household credit has continued to slow and has fallen broadly in line with growth in disposable income. As well, overall activity in the housing market has moderated.
But the central bank is still worried about the housing market, and particularly condos in Toronto.
"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 said.
"Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations."
That could start what the bank calls a negative feedback loop. A plunge in house prices would bite into net household worth, shatter confidence and consumer spending, impacting income and job creation.
-- The Canadian Press