There is no bubble in Toronto's condo market, says the economics department of Royal Bank of Canada, the country's largest bank and biggest mortgage lender.

And worries about the market are largely overdone, senior economist Robert Hogue says in a report to be released Tuesday.

He argues that the market does not pose as much risk as many people, including top policy makers in Ottawa, think it does.

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For one thing, he believes that record sales for new condos are picking up the slack that exists because fewer single-family homes are being built. Government actions aimed at curbing urban sprawl are restricting builders' ability to create new homes and so to meet the demand from the roughly 38,000 net new households in the Greater Toronto Area each year, builders must build upwards, Mr. Hogue says.

"Based on market activity to date, the total number of new housing units (condos, single-family homes, and others) completed by builders has not exceeded the GTA's demographic requirements and is unlikely to do so by any significant magnitude in the next few years," the report says.

Most condo units are finding occupants when they're completed, whether those are owners who live there or investors who find tenants, the report adds. Mr. Hogue believes that trend will continue thanks to population growth.

The portion of investors in Toronto's condo market is unknown, but Mr. Hogue says that condos have become the biggest source of new rental units in the GTA because few apartment buildings have been built.

Finance Minister Jim Flaherty and central bank Governor Mark Carney have both singled out Toronto's condo market as a source of concern.

There are more condos under construction in Toronto than any other city in North America, and more residential building is taking place in the Greater Toronto Area than ever before.

Mr. Flaherty's fears about overpriced real estate, and condo markets in particular, prompted him to surprise the market last month with new mortgage insurance rules that aim to take some of the wind out of the market's sails. He's trying to engineer a gradual slowdown of the market, fearing that otherwise it could crash at some point.

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Mr. Hogue's lack of concern about a bubble does not mean he thinks the market will boom, however. He expects condo prices to fall by perhaps 2 per cent to 7 per cent from their peak. He predicts that a two-tiered market could emerge, with condo prices softening while the market for single-family homes is resilient.

The report also hedges its bets somewhat, saying there is a small risk that too many investors in, for instance, one-bedroom units could create imbalances with the actual demand from families that could lead to a bubble.

Part of the reason Mr. Hogue remains unperturbed by Toronto's condo market is that he thinks some condo projects might be delayed or cancelled. He says that "the latest changes to mortgage insurance rules, upcoming interest rate increases, and waning enthusiasm from investors and speculators will reduce the flow of condo buyers in the market."