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Workers are seen at a condo development in the Liberty Villiage area in Toronto, April/2012

Kevin Van Paassen/The Globe and Mail

In his second weekly column for Globe Investor's month-long Home Buying site, housing bear Ben Rabidoux looks at which Canadian markets are most at risk.

The oft-repeated axiom in real estate is "location, location, location." Even housing "bears" recognize that there is no such thing as a Canadian real estate market. Granted there are macro factors that affect all regions equally, most notably the cost and availability of credit, but regional markets vary widely in terms of their fundamentals and, by extension, their vulnerability to a price correction.

The two markets that currently concern me the most are Vancouver and the Toronto condo market. Here's why:

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Vancouver Vancouver concerns me primarily because of the incredible disconnect that currently exists between resale prices and fundamentals such as rents, incomes, and inflation-adjusted house prices. The charts on this front are quite telling.

As I noted last week, when rents increase much slower than resale prices, it can be a symptom of abundant and cheap credit driving prices to irrational levels. As an aside, the fact that rents in Vancouver have lagged prices argues very strongly against this market being driven by population density and a lack of available land, as we so often hear. If this was the primary driver of this market, we would expect that increased demand for dwellings would apply to both houses and rental stock. This has simply not been the case.

The latest data suggests that the resale market in Vancouver may be running out of steam. Active listings are near all-time highs for this month, sales are at decade lows, and prices are now falling on a year-over-year basis.

The bottom line is that there is no other city in Canada where the fundamentals are this ugly. The risk of significant price declines in this market is enormous.

Toronto: The Toronto condo market concerns me for a very different reason. While prices have also outpaced fundamentals, most notably rents, what concerns me most is the potential inventory in the pipeline at a time when existing inventory is quite high.

Condo starts in Toronto have been very high over the past few years. In this chart, condos are represented by the "multiples" category. There are currently 53,000 residential dwelling units under construction in Toronto, an estimated 48,000 of them are condos. Condo research firm Urbanation recently noted that there were 15,554 unsold Toronto condo units at the end of March, an increase of 27 per cent annually. They further estimated that if current trends persist, that number could approach the all-time high later this year.

With this much inventory in the pipelines, strong demand for new units is essential to absorb this inventory without adversely affecting prices. However, the majority of new condo units are currently being purchased by investors and not end users. This is quite concerning considering that most new condo units in the GTA do not generate enough rents to cover ownership costs for investors, meaning they are cash-flow negative.

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What this implies is that many investors are banking on continued strong appreciation in these units to make any money. This raises two enormous questions:

1) If the price of Toronto condos stagnates, will these same investors still line up to purchase new units? If not, how will all that unsold inventory affect the supply/demand balance?

2) How will current investors react if their expected capital gains begin to vanish and condo prices languish or even fall and remain suppressed? Will they continue to hold their cash-sucking "investment" or will they sell out, adding more inventory onto a weakening market?

On this front, the latest resale data should concern us. The headline 10 per cent increase in Toronto house prices is being largely driven by the detached segment while condos are beginning to lose steam and have largely moved sideways over the past year.

The bottom line is that no one reasonably expects the potential fallout of a housing correction to be felt equally across Canada. Some areas are far more at risk than others. The message for new buyers contemplating jumping into home ownership in these riskiest markets should be clear: Tread lightly!

Analyst and strategist Mr. Rabidoux covers Canadian macro economic trends with a focus on housing and consumer credit. He also has a website,

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For tips, stories, videos and live chats about what's going on in the real estate market, check out the Globe's Home Buying section for daily updates.

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