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Economists are increasingly sounding the alarm bells for condo investors in Toronto and Vancouver, saying a tsunami of new units in the coming years will weigh on prices.
"We're just seeing the first waves of delivery. Right now, builders are building on past demand and past demand is growing at about twice the rate of what natural housing growth is, in the Toronto area in particular," Sheryl King, Canada Economist at Bank of America Merrill Lynch, tells BNN. "The market is becoming so saturated that it's tough to get enough rent to cover your mortgage payment and that means people are depending solely on the fact that home prices keep rising to make this a good investment decision."
"It's getting tough to make this a good investment decision right now," she says.
Finn Poschmann, Vice President of Research at C.D. Howe Institute, tells BNN that once those units come onto the market, prices only have one way to move.
"The quantity coming on the market in the next two years will absolutely be huge and there's no question that will start to swamp demand and swamp absorption, so you'll start to see completed, but unoccupied units and that will depress resale prices -- and it can turn pretty quickly," he says.
King adds that once condo prices begin to flatten out, investors banking on capital gains will begin to move out of the market, kicking off what she calls a "negative feedback loop."
"A reasonably healthy correction would be a 10 to 15 percent decline in the condo market," she adds.