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Workers are seen at a condo development in the Liberty Villiage area in Toronto, Ont., in this April, 2012, photo.

Kevin Van Paassen/The Globe and Mail

Toronto's slowing condo market will stabilize next year, but the risk that prices will fall is greater in the longer term, Canada Mortgage and Housing Corporation says.

Shaun Hildebrand, a senior market analyst for the Greater Toronto Area at CMHC, presented his latest thoughts on the market at a conference Wednesday morning.

The large quantity of cranes dotting the city's skyline are part of the reason why many observers have suggested that Toronto's condo market could be in a bubble, one that could precede a significant drop in prices.

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But Mr. Hildebrand said he's far less worried than many. "I'm not overly concerned, although there are risks," he said in an interview. Among those are the rising proportion of condos that are owned by investors, and the large increase in new condominiums that will be completed in the years ahead.

One risk that Mr. Hildebrand doesn't subscribe to is the much-discussed notion that foreign investors are propping up the market.

"I don't see that there will be any sort of mass exodus of foreign money," he said. While there are no statistics on the proportion of new condos that are being bought by foreigners, Mr. Hildebrand said that surveys by the Municipal Property Assessment Corporation suggest that about four per cent of the condos in Toronto are owned by people who don't have Canadian citizenship.

Mr. Hildebrand also takes comfort from some lessons he's learned by studying the condo bubble that occurred in the late 1980s.

"Even though today we see that the number of units under construction is about twice as high as it was back then, the share of units that are unsold is relatively low," he said. "When a project comes to completion today it's 95 per cent presold. In the late 1980s bubble it was at best 60 per cent sold."

Buyers also generally put down larger deposits today, making it harder to walk away.

"Condo prices from 1985 to 1989 rose by 170 per cent, so there was a lot of speculative activity going on then," he said. "And then you were entering into a very significant recession that hit the labour market in the early '90s, and interest rates went into the double digits. But despite that perfect storm we only saw prices decline by about 25 per cent over the course of the next seven years, a relatively small amount in relation to the run up, so that tells us that prices are pretty sticky on the way down."

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In addition, Mr. Hildebrand said that a lot of investors who bought condos in the late '80s held onto them when the market got tough.

Another statistic that gives him comfort: he says that in the past decade condo prices have risen by about 55 per cent, while the price of all other homes have risen by about 75 per cent.

Moreover, he compared Toronto prices to those in other cities around the world, and found that prices for prime condo space in areas like London and Paris are twice as high as they are for prime space in Toronto, and in New York and Tokyo they're about 30 per cent higher than here.

"So even though we're seeing all of this supply, all of this building taking place, it's not necessarily a prescription that prices have to decline," he said. "In the short term we're quite confident that prices will hold up. They may decline slightly over the next six to nine months, but in an environment where interest rates remain low and the economy's holding stable, any sort of reductions in price are just going to help to improve affordability and set the stage for a better level of sales towards the end of 2013."

While he doesn't see sales rebounding to the levels they were at prior to the moves Ottawa made in July to tighten up the mortgage market, he does expect them to be "a little higher" than they are now.

"The longer term comes with some greater risks," he said. "There's almost 50,000 units under construction right now, an increasing share of investors are believed to own these units, so it's going to be key to understand what they choose to do with their units when they come to completion. Right now a lot of them are holding on. But will they continue to do that in the future? And the bigger question is what demand is going to look like. It's obviously more difficult to anticipate the economic environment a few years out than it is say over the next year or so. So that's where the risks lie, I would say 2014, 2015."

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