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Chris Roussakis/Reuters

Anyone watching recent real estate data out of Toronto and Vancouver has probably concluded that the Vancouver market is starting to weaken while Toronto's is still firing on all cylinders.

Figures from the Canadian Real Estate Board showed that house prices fell 7.5 per cent in Vancouver in April from a year earlier, while Toronto prices rose by 8.5 per cent.

But economists at Toronto-Dominion Bank warn that the two cities are diverging less than this data suggest. "In the near term, we expect the divergent fortunes of these big-city markets to diminish, but longer term both markets are likely 15 per cent overvalued," Derek Burleton and Leslie Preston, write in a new report.

"Perhaps the most striking similarity is the fact that both markets have been driven largely by condo activity, reflecting demographic trends, erosion in affordability of single-family homes [and] land scarcity due to either geography (Vancouver) or regulations (Toronto)."

Over the last decade, 73 per cent of new housing in Vancouver has been multiple unit housing. In Toronto, the figure is 63 per cent. The trend has accelerated over the last year, with 80 per cent of new housing in Vancouver consisting of multi units and 74 per cent in Toronto.

Market trends have supported new condo supply for a long time. Canada Mortgage and Housing Corp., for example, estimates that between 20 per cent and 25 per cent of all condo purchases in Vancouver and Toronto are made by investors, who rent the units. Nevertheless, the winds are shifting, Mr. Burleton and Ms. Preston say.

"Vancouver appears to be wrestling with a growing challenge of oversupply while in Toronto, the worries surround over-building and the potential for a supply glut over the medium term," they write.

Condo prices in Vancouver have been essentially flat since mid 2008 and prices in Toronto have increased moderately by 5 per cent, year on year. In Toronto there is enough new supply coming to market to last for nearly two years, based on recent buying patterns, the economists say.

"The concern is when the units are completed, do owners put them up for sale again, which would increase the supply on the resale market and put downward pressure on prices? Or, if they go on the rental market, are there are enough renters to absorb the supply set to come on the market over the next few years?," write Mr. Burleton and Ms. Preston.

"Even if demand stays robust, we suspect that a share of the bulge in units currently under construction will remain unsold and lead to growing inventories."

While the economists forecast that prices in both Vancouver and Toronto will decline by 15 per cent over the next two to three years, they warn that any major shock to the economy from abroad could make the correction faster and deeper.