Article content continued

Here are the three warning signals it has identified in the Toronto condo market.

1) Since June 2011 the number of unsold high-rise units in the pre-construction stage has doubled.

“Unsold units under construction have also increased from fewer than 5,000 at the beginning of 2012 to almost 7,000.”

2) The prices of high-rise units have flattened while their sales have declined, suggesting that demand is slowing while the supply of unsold units (including those not built) is still strong. The bank said developers are seeking to cut the risk by postponing projects, but delays (or cancellations) are expensive.

“For example, in Ontario, once a contract is signed, condominium builders are liable to buyers for up to $7,500 of expenses incurred because of a delay in completion beyond conﬁrmed occupancy dates.”

3) The average square footage of sold high-rise units has been decreasing since 2010. The bank says anecdotal evidence suggests that is because of a rise in demand by condominium investors — who prefer smaller units.

“Greater involvement by investors could potentially increase the volatility of housing prices and sales, under stressed conditions,” said the bank.

The bank is worried that investors are spurring construction beyond demographic demand, which could bring on a “sudden correction in prices.”

The bursting of the condo bubble could then create a downward spiral that ultimately would affect all levels of the economy.

A steep drop in condo prices could push down all housing prices and the housing market as a whole. “This would likely lead to a decline in housing activity, adversely affecting household incomes and employment, as well as confidence and household net worth, which would in turn reduce household spending.”

Loan losses at banks would then increase, bringing on a credit squeeze as lenders came under stress. “These interrelated factors would further dampen economic activity and add to the strains on household and bank balance sheets,” the bank said.