The future looks bright for real estate investors in the prime Canadian cities of Vancouver and Toronto.

That’s because despite new measures meant to curb foreign demand, prices for luxury condos are still on the upswing heading into 2018, with more room to grow, experts say.

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"Toronto is an emerging city on the world stage," said Christopher Alexander, the executive vice president for Re/Max Integra, Ontario-Atlantic Canada, noting that prices have steadily increased by double digits in the luxury sector year over year.

But at just C$1,500 (US$1,169) per square foot in many areas, luxury Toronto property is also still a considerable value when compared to prices in New York, London and Hong Kong. The average price per square foot for all condos in downtown Toronto is about C$820 per square foot, compared to about C$2,300 in downtown Hong Kong, according to a Century 21 Canadareport.

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"We’re still undervalued when it comes to luxury properties," Mr. Alexander said. "We’ve got a long way to go, and the future looks good."

In Vancouver—where new condos start at C$1,600 (US$1,247) per square foot and hit C$2,500 (US$1,949) per square feet in a Westbank project called Alberni earlier this year—Michael Ferreira, principal at real estate consultancy Urban Analytics, believes there is still some room to grow.

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"I anticipate that new projects coming to market in the next six to 12 months will try to get C$3,000 (US$2,339) per square foot in 2018," Mr. Ferreira said, adding that it will, "be interesting to see how deep the demand is for this product."

If things continue as is, he said, "the outlook is still very strong."

However, there are some caveats to this upward trajectory in the luxury sector that potential investors should be aware of, which differ by market.

Vancouver: Condo prices up, as single-family home prices dip

The big story in Vancouver is the tremendous price growth of luxury condos since 2015, which British Columbia tried to slow with a 15% foreign buyers’ tax in August 2016.

A second "empty home" tax, which went into effect in January 2017, requires Vancouver homeowners to pay 1% of a property’s value if they leave it vacant for more than six months of the year.

While there was a slight price dip from August 2016 to March 2017, the market rebounded and has been going up since then, with neither measure really having any effect on the condo market’s growth, Mr. Ferreira said.

"When you’re dealing with a buyer who can afford C$2,500 to C$3,000 per square foot," he continued, "a 15% tax is more of an annoyance than anything else."

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And as downtown condo prices have skyrocketed, Vancouver residents and first-time homebuyers have been pushed into smaller downtown resale units or to eastern suburbs, such as Surrey and Langley, where prices for one-bedroom condos are still increasing by 3% a month, realtor Steve Saretsky with Sutton West Coast Realty said. "There’s this local binge," he continued, "where everyone is rushing to get into the market."

But unlike the thriving condo market, the detached single-family home market is a "slow drip"—relatively flat with subtle, but persistent, price decreases—particularly when you get over C$2.8 million (US$2.2 million) on the west side of the city, Mr. Saretsky said.

"There’s been a huge shift of foreign buying activity away from resale properties into presale condos, many of which are sold in Hong Kong," he said, noting that many of these foreign buyers put their 20% down with plans to flip the unit before they ever close or move in. "If you’re going to speculate on the Vancouver market, this is probably the best way to do it," he said.

It’s for this reason that he doesn’t predict that the detached market will pick back up.

Some uncertainty about what the government will do next

As condo prices have continued to increase and affordability has remained an issue for residents, the City of Vancouver recently released a housing strategy that could mean a new tax for property flipping and an increased luxury tax, both of which would impact foreign investors if these measures are passed and approved by the provincial government.

The document also outlines that the city is considering restricting property ownership by non-permanent residents, as Australia and New Zealand have done.

"Everyone is still holding their breath as we wait and see if these additional measures will be brought in," Mr. Ferreira said. In terms of how this all could impact long-term investment potential in Vancouver, "everyone needs to wait and see how this will pan out," he said.

Some demand seen outside of the metro area

While most investor demand for luxury properties is in Vancouver’s downtown district, some foreign interest has expanded into other markets in British Columbia, Mr. Ferreira said.

For instance, in markets such as Victoria and Nanaimo, which is located on Vancouver Island, there’s a good stock of single-family homes and the foreign buyers’ tax doesn’t apply.

The Okanagan region offers vineyards as well—effective places to park foreign capital without paying the investor tax, Mr. Ferreira said.

Toronto: Luxury price growth expected to continue, but at a slower rate of increase

Following in British Columbia’s footsteps, Ontario announced a 15% foreign buyers’ tax in April for properties purchased in metro Toronto, after luxury condo prices were up 85% year-over-year in the first quarter of 2017 versus 2016.

Since then, the overall Toronto property market took a big slowdown, Mr. Alexander said. But the luxury market continued its upward climb.

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"Luxury really operated on an island this year, meaning that prices didn’t come down and the number of sales didn’t really drop," he said. "The only change that did happen is that properties have remained on the market a bit longer than they used to."

Looking ahead, 2018 is likely to be interesting, Mr. Alexander said. The government put in some more rules for mortgages, which as of Jan. 1, will require people to be approved at a higher interest rate to manage the debt load.

This is expected to have a dampening effect on the general Toronto market, where prices should remain flat in early-2018, if not drop off a bit. But this likely won’t impact the luxury buyer, and certainly not the foreign investor, Mr. Alexander said.

It may, however, have some impact on local homebuyers, including the baby boomers who bought their suburban homes 25 years ago and have since watched their value almost quadruple in value. Today, many of them are selling off these homes in favor of luxury condos downtown, which they prefer because of the city lifestyle and ease of property maintenance, Mr. Alexander said.

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Overall, though, whether it’s in Toronto or the nearby town of Oakville, where prices have increased 112% year over year, Mr. Alexander said, in part because of the foreign demand, he expects that prices will continue to increase—but probably not as quickly.

"Toronto is just an awesome city," he said. "It’s really coming into its own."