The evidence of the Toronto condo boom is hard to miss. Cranes are ubiquitous on our skyline and construction sites seem to multiply endlessly. Given the seemingly insatiable demand for high-rise units as of late, policy makers and analysts have become concerned that the market's current appetite for units is unsustainable. RBC Economics, however, has concluded in a recent report that structural changes in the Greater Toronto Area's housing mix coupled with demographic trends will not lead to a collapse, but rather trigger a relatively mild 2%-7% price correction.

In the last decade there has been a pronounced change in the proportion of low-rise units constructed relative to the number of high-rise units. With the sale of single family homes dipping to a rate roughly half of that seen ten years ago, new condo construction has picked up the slack. Increasing resistance to "lateral growth" in the form of urban sprawl is also contributing to the surge in condo construction. The trend is aided by the provincial government's Growth Plan for the Golden Horseshoe which seeks to limit the consumption of greenfield sites by imposing intensification targets on communities within the GTA. The result is a favoring of vertical growth in the form of high-rise projects. Demographics also favour current market trends. With the population of the GTA growing at a rate of approximately 100 000 per year, and with the subsequent need to construct 38 000 units per year to house these new arrivals, the pace of condo sales appears more reasonable.

Given the almost extemely low rate of construction of purpose-built rental apartment units, condos have provided an important injection of space into a rental market with a tight vacancy rate of 1.1%. Dispelling fears that investor driven purchases will leave towers empty of residents, unoccupied condos constitute only 7.5% of all completed units in the past 12 months, a rate that is half of the average since 1980. Also, contrary to the belief the investors are buying units to simply flip them, only 10%-15% of new condos are listed for sale within 12 months of registration.

There are still, however, some causes for concern. There is a risk that investor preferences for small units will not only cause a reduction in square footage per unit, but may cause a discrepancy between units produced and those favoured by potential occupants. There are already signs that the market is cooling with high-rise condo sales falling in the first 5 months of 2012 relative to the same period in 2011. Changes to mortgage rules, interest rate increases and financing constraints will also all work to reduce activity in the market. The fundamental integrity of the market, however, remains sound.

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