The condominium market in Canada shows “emerging signs of oversupply” but there is no crash imminent, says a report by the Bank of Nova Scotia.

“We have a situation of rising multi-housing unit inventory which has been trending up since 2008,” Adrienne Warren, senior economist for the bank told a real estate forum Tuesday. “The current outstanding stock of unsold new homes is higher than average.”

The supply overhang means that “soft pricing conditions” for the condo market will characterize 2011, said Warren, especially “if first-time homebuyer demand weakens more than expected.”

However, Warren is not calling for a crash in the condo market. The severity of any potential correction depends on future building, which would impact supply, she says.

“Barring a further ramping up of multi-unit building, we expect these excess units can be absorbed without a major price adjustment,” said Warren. “The overall number of units under construction has stabilized, with current starts being matched by an equivalent level of completions.”

Capital Economics analyst Dave Madani said in a separate and more downbeat report Tuesday that any correction in the housing market is likely in the second half of 2011.

“A downturn in the housing market later this year will lead to further slowdown in consumption growth and a more severe contraction in residential investment,” said Madani. “A correction in the overheating housing market could derail the domestic recovery.”

Madani had forecast earlier that home prices in Canada were as much as 25 per cent overvalued.

Scotiabank chief economist Warren Jestin said 2011 will bring a softer housing market, but unlike Capital Economics, is not forecasting a major price adjustment.

“We may see some price corrections, but it won’t be a bubble.”

Housing sales overall should come in about 15 per cent below the 2007 peak, but in line with the 10-year average, according to the bank.

Warren says it is likely that prices will go “sideways” for the next four or five years. She is forecasting that home prices overall will increase by 2 per cent by the end of 2011.

“Historically, home prices tend to overshoot, then they undershoot until incomes and growth catches up.” With inflation at about 2 per cent, that is effectively flat pricing, said Warren.

The condominium segment however, remains the most vulnerable to overbuilding, say analysts.

Multi-unit dwellings now account for more than half of all new housing being built in Canada.

In 1981, about 3 per cent of homeowners were living in condos. In 2006, that number had surged to 11 per cent. In the Toronto market alone, there were 286 projects being marketed at the end of 2010, thought to be the most of any city in North America.

However, Warren says the market can absorb a larger number of condos being built today in part because of favourable demographics. An aging population is moving toward a turnkey lifestyle, and buyers younger than 35 have also increasingly turned to highrise living.

Affordability has also been a major factor, since condos are cheaper than single detached housing, especially in built-up downtown areas.

That could be impacted by increases in interest rates moving forward. The Bank of Canada held firm on their key overnight rate on Tuesday, leaving it at 1 per cent. However, those rates are forecast to go up by 1.5 to 2 percentage points a year from now, said Jestin. That will put a further crimp on the market.

Another issue for Ontario is the high-flying loonie.

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The Bank forecasts the Canadian dollar could go as high as 1.08 (U.S.) this year. That would hurt the manufacturing sector and the jobs that go with it.

Phil Soper, president and CEO of Royal LePage Real Estate Services said despite the ups and downs in the economy, the Canadian market remains relatively strong.

“Despite all the doom and gloom we hear coming out of the U.S., attitudes toward home ownership remain buoyant in Canada.”

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