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Deborah Baic/The Globe and Mail

Ottawa's efforts to cool off Toronto's red-hot condominium market appear to be having an impact, as prices begin to ease and developers pull back on projects and bidding for land.

In recent weeks, prices on existing units have been softening, while some developers have abandoned or rewritten their plans for new condo projects, industry experts and insiders say. Prospective buyers are also increasingly cautious in a market where prices have shot up about 50 per cent since 2005.

So far, the evidence of a slowdown is primarily anecdotal, not statistical. But some economists are hopeful that the signs are pointing to a modest, and relatively painless, correction in condo prices.

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That would reduce the potential damage of a rapid decline and bring much relief to policy makers like Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. Both have been openly worried that the frenetic building boom in condos in Canada's most populous city will lead to a market crash, pulling not only real-estate investors but many young first-time buyers down with it.

According to research firm Urbanation Inc., more than 6,000 new units sold between January and March of this year, the highest amount ever for that period. Developers are seeking to cash in on the frenzy, and more new units are now under way in Toronto than any other city in North America.

But on Monday, economists at Toronto-Dominion Bank said they expect a price correction of at least 15 per cent in the next two to three years for homes in Toronto and Vancouver.

And Craig Wright, senior vice-president and chief economist at RBC, is now predicting that demand will ease next year because of rising interest rates in the fourth quarter

A severe downturn in the market would cause significant problems for the government, not only because it would cause economic shock waves but because both Mr. Flaherty and Mr. Carney would inevitably shoulder a large portion of the public blame. The tactics used so successfully to keep the market going in the wake of the financial crisis – namely prodding the banks to lend more by purchasing $69-billion worth of their mortgages and maintaining record-low interest rates – are part of the reason why condo prices in Canadian home prices have reached levels that almost all experts say are unsustainable.

During this period, Mr. Flaherty and Mr. Carney have unleashed a torrent of words aimed at convincing banks, developers and buyers to be careful. Now, it seems, buyers may be heeding those warnings.

"People are really scared right now," said real estate agent and author Brian Persaud. "When Flaherty says the condo market is overheated, you get people who have bought [units] walking away within the 10 day cooling off period."

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A number of condo projects that have recently hit the market have had a tough time selling units, he said. "Before, in the first couple of months you'd sell out maybe 70 per cent of the building. That's not happening now – some buildings are languishing at 30 or 40 per cent sales."

Historically, the Canadian banks have waited for 70 per cent of a new condo development to be sold before agreeing to finance the project, taking unit deposits as security. But now it seems that isn't enough: Some nervous banks are requiring sale of up to 80 per cent.

This pushes developers further to secure sales. "They are coming to guys like me and saying 'Brian, come sell our units. We'll offer you higher commission. We'll give people better incentives,'" Mr. Persaud said.

There are other "sobering" indicators signalling that the condo industry is self-correcting, said Julie Di Lorenzo, president of Diamante Development Corp. and an industry veteran.

"People don't talk about the recent relaunches or cancellations [of projects]. They make it sound like everything's rosy, that everything's great right now," she added, noting that overpriced projects don't get sold.

Once developers have invested in rezoning land and designing a project, they'll have a financial stake in the building at least until its closing, a process that takes upward of five years. That's a long time in an uncertain market. "Fewer developers are bidding on land right now," Ms. Di Lorenzo said.

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"This is not out in the market yet, but if you look in the high-end, namely condominiums that have been selling for more than $700 per square foot, we are seeing some gradual decline in prices there," said Benjamin Tal, deputy chief economist at CIBC World Markets. "And I think that will trickle down to lower-priced condominiums."

But this healthy cooling of the market may not be enough protection against an investor exodus should interest rates rise by about 150 basis points, Mr. Tal said. At that point, many investors would not be able to meet their costs through rental income from their tenants.

It's even harder for Ottawa's policy makers and economists to gauge what affects this could have, since Canada does not keep reliable real-estate data on the influence of foreign investors.

Even within Canada, the big-city markets are unlikely to respond to higher rates exactly the same way. Real-estate investors in Toronto's tall towers are less loyal to the city than those in Vancouver, where many of the investors, for instance, have a spouse in China but live here or spend much of their time in Canada, Mr. Tal said.

If interest rates increase significantly, many investors could leave the market, causing prices to decrease.

"Any softening that we're seeing now is a bonus," Mr. Tal said. "It will prepare us for the eventual increase in interest rates. Builders are sensing this already, and we see more and more builders downscaling future purchases of land."

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Of course, it's possible the stern warnings of Mr. Carney and Mr. Flaherty could become a little too effective.

Stephen Diamond, CEO of developer Diamondcorp, expects to see the market slow, but asks "what are the consequences? Have the governments damaged an otherwise healthy market?" A soft-landing could offer protection, but frightening investors stands to produce a new set of problems. After all, investor-owned condos soon become the city's rental units.

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