For the second time in less than a week a Canadian bank has issued a warning about the real estate market overheating.

Home values are headed for a correction and could drop by about 12 per cent within the next two years, says the Toronto-Dominion Bank in an economic note Monday.

“Toronto and Vancouver are the two most vulnerable markets” said TD economist Sonya Gulati in an interview Monday. “We can expect to see some decline in the next seven to eight quarters.”

The TD report comes on the heels of a report Wednesday by the Canadian Imperial Bank of Commerce that said homeowners could expect a “gradual” correction in the market over the next several years.

A 12 per cent drop in the cost of an average Canadian home of $346,950 would translate into a greater than $41,000 haircut for home owners. The bank also said potential overbuilding in the high rise market meant special attention is warranted.

“Toronto and Vancouver have seen a build up in new condo activity over the last two to three years” said Gulati in her note. “While concerns of overbuild are not yet pressing, these markets are in a more vulnerable position given current inventory levels, vacancy rates and overvaluation in the resale market.”

Led by Ontario, Canadian housing starts rose 1.7 per cent to a greater than expected 197,400 annualized units in June over May, according to figures released by the Canada Mortgage and Housing Corporation Monday. Analysts were calling for starts in the 178,000 range.

The Toronto market alone saw starts rise by 23 per cent, fuelled by growth in the single detached and highrise sectors.

Highrise starts are now 57 per cent higher in the first six months of 2011 compared with last year.

With major sales in the pipeline, CMHC says highrise construction will be strong for the remainder of the year.

“Apartment construction will remain brisk but slower job growth, more balanced resale markets and tighter mortgage markets should temper the pace of construction activity in the months ahead,” said CMHC regional economist Ted Tsiakopoulos.

Analysts say the new supply will end up competing with existing housing stock, which will dampen any price appreciation in the market. While sales are strong now, that may cool off in the future as investors re-evaluate their returns as prices have been rising faster than rents.

“We expect a gradual correction in the number of new condo units going forward but the level of new units in the pipeline should be monitored,” said Gulati.

Also read:

Housing correction coming Sharp or slow?

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