Condo developers in Canada’s three largest metropolitan areas are building too many condos — 36 per cent to 68 per cent too many, according to a new study from Royal LePage.

As a result, condo markets in Toronto, Montreal and Vancouver will experience some “turbulence” as developers shift down the amount of construction, economist Will Dunning said in the report.

But Dunning says fears of a potential bubble in the condo market are unfounded, because demand for them will remain high in the face of a growing shortage of rental units, among other reasons.

“An essential element of a ‘bubble’ is that demand becomes divorced from economic fundamentals and that has not occurred in the markets for condominiums,” Dunning wrote in the Royal LePage report.

All the same, the situation as it stands suggests condo construction is well above projected demand.

Dunning estimates that the three cities will require between 26,000 and 32,000 new apartment units every year over the next 20 years, but in recent years, developers have been starting units at an average rate of 43,774 per year.

That works out to between 36 per cent and 68 per cent too many condos.

royal lepage condo chart

This chart from economist Will Dunning shows condo construction starts in Canada's three largest cities compared to estimated demand for condos. "Stable choice rates" represents a low-ball estimate for condo demand; "shifting choice rates" represents the high end of the estimate for condo demand.

“It is likely that future construction will slow to levels that are more in line with the growth rate and evolving demographics of the population,” Dunning writes. Over the next few years, Dunning says, "there may be some instability" in the market as it settles into a new, slower normal.

Developers may have noticed the gap between supply and demand. Dunning notes that there is a discrepancy between the number of condo units started and the number completed in recent years, suggesting a "bottleneck" of condos that have been delayed or will not reach completion.

But Dunning expects demand for condos to remain high in the medium and long term, in part because he expects a larger share of today’s youth to move into condos than was the case with their parents.

Other research has suggested this could be the case. Canada’s urban infrastructure has not been keeping pace with population growth, meaning major cities in the country are experiencing escalating gridlock problems.

That is pushing more and more people to live in high-density areas close to where they work, PricewaterhouseCoopers (PwC) said in a recent report.

Reverse migration from the suburbs to downtown areas [is] one of the most forceful and rapidly emerging trends in both corporate office and residential real estate,” PwC said.

The Royal LePage report found that just under 15 per cent of households in the three cities are condos (for the country as a whole, it’s about eight per cent), but more than one-third (37.7 per cent) of all new home construction in recent years was condos.

Dunning says demand for condos will be held up by demand for rental units. Many condos are bought by investors who intend to rent out their apartments, and very low rental vacancy rates in the major cities suggests there is a shortage of rental housing in Canada, Dunning suggests.

With standalone house prices in major cities moving out of affordability range, many homebuyers simply have no choice but to buy condos.

The benchmark price of a detached house in Greater Vancouver is now $922,600, the city’s real estate board reported last month, while condos go for $365,600, on average.

In Greater Toronto, the average price of a detached house in November was $671,000, according to the Toronto Real Estate Board. An average apartment unit goes for $361,000.

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  • What $390,000 Will Buy You Across The Country

    The average price of a house in Canada in the fall of 2013 was about $390,000. Here's what that amount will buy you in the country's various real estate markets.

  • Trois-Rivieres, Que. - 3-bedroom house

    Trois-Rivieres is one of the most affordable housing markets in Canada, and here the average house price will get you something close to a palace. Three bedrooms and some pretty awesomely fitted-out bathrooms in this 2,000-square-foot home.

  • Trois-Rivieres, Que. - 3-bedroom house

  • Trois-Rivieres, Que. - 3-bedroom house

  • Trois-Rivieres, Que. - 3-bedroom house

  • Trois-Rivieres, Que. - 3-bedroom house

  • Trois-Rivieres, Que. - 3-bedroom house

  • Trois-Rivieres, Que. - 3-bedroom house

  • Toronto - 1-bedroom house

    This 580-square-foot cottage is located in Toronto's inner east end and has one bedroom on the main floor and a second in the basement. It may be small, but it's actually sort of remarkable that you can still buy a standalone house anywhere in the 416 for under $400,000. Listed at $389,000.

  • Toronto - 1-bedroom house

  • Toronto - 1-bedroom house

  • Toronto - 1-bedroom house

  • Toronto - 1-bedroom house

  • Toronto - 1-bedroom house

  • Regina, Sask. - 3-bedroom house

    This custom-built split-level house on the east side of Regina has 1,800 square feet of floor space, and features a family with room with a fireplace.

  • Regina, Sask. - 3-bedroom house

  • Regina, Sask. - 3-bedroom house

  • Regina, Sask. - 3-bedroom house

  • Regina, Sask. - 3-bedroom house

  • Regina, Sask. - 3-bedroom house

  • Regina, Sask. - 3-bedroom house

  • Vancouver - 1-bedroom loft

    At 548 square feet, this loft condo is only slightly smaller than that cottage in Toronto. But it's certainly slicker; it's located in yuppie-ish Yaletown and features a stainless-steel appliance kitchen with a movable island. Listed for $384,000.

  • Vancouver - 1-bedroom loft

  • Vancouver - 1-bedroom loft

  • Vancouver - 1-bedroom loft

  • Vancouver - 1-bedroom loft

  • Vancouver - 1-bedroom loft

  • Vancouver - 1-bedroom loft

  • Summerside, P.E.I. - 4-bedroom house

    $388,000 will get you this house with four bedrooms and as many fireplaces in charming little Summerside. A whopping 4,464 square feet of floor space on a half-acre lot makes this easily the largest home on this list.

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Summerside, P.E.I. - 4-bedroom house

  • Fort McMurray, Alta. - 2-bedroom condo

    Fort McMurray, the heart of Alberta's oilsands, may be a small city, but thanks to enormous oil business salaries, it has real estate prices like a big city. This two-bedroom condo on the south side of town features oak cabinets and a gas fireplace, and lists for $393,500.

  • Fort McMurray, Alta. - 2-bedroom condo

  • Fort McMurray, Alta. - 2-bedroom condo

  • Fort McMurray, Alta. - 2-bedroom condo

  • Fort McMurray, Alta. - 2-bedroom condo

  • Fort McMurray, Alta. - 2-bedroom condo

  • Montreal, Que. - 3rd floor, 2-bedroom apartment

    Like in Toronto and Vancouver, $390,000 isn't quite enough to buy you your own standalone home in central areas of Montreal these days. But you can still get a lot more space for the money than you would in those other cities. This two-bedroom apartment on the third floor of a gorgeous stone building in the Plateau has 962 square feet of floor space. Lists for $389,000.

  • Montreal, Que. - 3rd floor, 2-bedroom apartment

  • Montreal, Que. - 3rd floor, 2-bedroom apartment

  • Montreal, Que. - 3rd floor, 2-bedroom apartment

  • Montreal, Que. - 3rd floor, 2-bedroom apartment

  • Mississauga, Ont. - 2-bedroom condo

    Mississauga is not known for its architecture, but maybe it should be, because some of the condo towers going up around Square One are far more interesting than the ones going up in downtown Toronto, 35 km to the east. For $385,000 you can move into a two-bedroom condo in the buildings known as the "Marilyn Monroe towers." The twin buildings were the 2012 winners of Emporis' <a href="http://www.huffingtonpost.ca/2013/09/18/absolute-world-towers_n_3943895.html" target="_blank">best new skyscraper in the world award</a>. Listed at $385,400.

  • Mississauga, Ont. - 2-bedroom condo

  • Mississauga, Ont. - 2-bedroom condo

  • Mississauga, Ont. - 2-bedroom condo