Concerns about a Toronto condo bubble may be "overblown," and there is no evidence to support them, according to a report released today by Royal Bank.

The report's author, senior economist Robert Hogue, wrote that while condo construction is booming and redefining Toronto's skyline, and sales are at record highs, the trends aren't as worrisome considering the broader housing context of Canada's most populous city.

Condos are picking up the slack left by fewer single-family homes being built in the Greater Toronto Area (GTA), the report said, and the total number of new housing units (condos and homes) completed by builders hasn't yet exceeded the demand. It's not expected to "by any significant magnitude" in the next few years, according to the analysis by RBC's economics research division.

"The strong presence of investors in the condo market raises the risk of a mismatch among the types of units supplied and ultimately demanded for occupancy, but, at this point, we do not equate this risk with a bubble," the report said.

Flaherty raised concerns about market

The Toronto region is experiencing a record level of condo construction, but that is not proof of any excess, according to RBC.

The construction cycle for condominiums is up to three years and the number of units nearing completion is rising rapidly, but that's happened while single-home completions have "become a diminished factor" in the GTA.

Overall, total home completions for all housing categories remain well below historical peaks, the research shows.

Finance Minister Jim Flaherty is among those who have raised concerns about an overheated condo market in Toronto.

When he announced new mortgage rules last month, he said it was one of the reasons he felt Ottawa had to intervene.

Bank of Canada governor Mark Carney has also issued warnings about whether the supply of condos will meet the demand in the years ahead.

But the RBC analysts who looked at statistics found the vast majority of new condos are being occupied.

"Concerns that large numbers of newly built condo units are sitting empty are simply not supported by the statistics," they said.

Unoccupied condos represent approximately 7.5 per cent of the units completed in the previous 12 months.

RBC anticipates that new condo units will continue to find occupants in the months ahead, and that Toronto's demographic trends will support the demand for not just condos, but other kinds of housing units as well.

Market expected to cool

If Toronto's population drops or other demographic changes occur, the authors acknowledge, the GTA's capacity to absorb all new condo units could be tested.

Concerns about the actions of condo investors and speculators may be "somewhat overblown," or, at the very least, premature, the paper said.

Investors who buy units in order to rent them are a large proportion of condo buyers, but there is little evidence of dangerous property flipping, according to RBC, and it's not hurting the market or causing significant inflation.

Investors, in fact, have helped alleviate a tight rental market in the GTA and elsewhere in Canada, the report said, and they are helping to meet strong rental demand.

There is some risk that condo investors might misjudge what kinds of units there will be demand for in the coming years, Hogue told CBC News. For example, too many one-bedroom units could flood the market and exceed demand. That potential mismatch poses the biggest risk in the years ahead, according to RBC.

The absence of a bubble doesn't mean there are no risks in the market, he said.

"There are still some risks in the market, and we're expecting some cooling, largely because we expect interest rates to start rising next year," he said.

The federal government's new mortgage rule changes are also expected to have an impact on the market in Toronto and across the country, he noted.

"In our view, this is going to affect first-time buyers. This is raising the bar for home ownership in Canada so it will have a cooling impact," he said.

There is evidence of cooling in the condo market already, the report said, citing a drop in sales of high-rise units in new condo projects in the first five months of 2012 relative to the same period in 2011. Meanwhile, sales of new low-rise units –primarily single-family units – have held up so far.

The interest rates and mortgage rules, in combination with waning enthusiasm from investors, are all expected to slow the demand for condos going forward, the report concludes. Overall housing construction (all categories included) is unlikely to diverge from the number of households being formed as the GTA's population grows, and that reduces the risk of a collapse of the market.

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