Vancouver and Toronto housing markets are likely to experience a housing correction of at least 15% over the next two or three years, according to a TD Economics report.
"This correction is likely to be reasonably gradual as neither market, in our view, is showing bubble-like symptoms similar to the U.S. market prior to its massive 30% adjustment," the report by TD economists Derek Burleton and Leslie Preston concludes.
"That said, if the Canadian economy were to get hit by a severe shock from abroad, a quicker and more pronounced correction could occur."
The report cites an increasing number of condo units under construction and rising inventories in Vancouver and Toronto as a sign of condo markets that are "getting ahead of themselves."
Vancouver's housing market went through a period of overheating between 2002 and 2007, when the average price of a home in Vancouver rose 90%, compared with just 40% in Toronto.
Recent sales figures indicate a slow-down, although the decline is skewed somewhat by a number of high-end home sales in 2011.
Citing anecdotal evidence from the Canadian Real Estate Association, the TD report states that a record level of high-end home sales in Vancouver's richest neighbourhoods in the first quarter of 2011 inflated average prices.
"Now prices seem to be declining when compared to such a high base," the report states.
The report stops short of declaring Vancouver's real-estate market headed for a correction in 2012, stating that "despite the recent pull-back in sales, the market remains in balanced territory and underlying prices are continuing to expand.
"In our view, Vancouver's market is likely to show increased stability over the remainder of this year."
Longer term, however, the economists predict a gradual correction for both Vancouver and Toronto markets.
Both markets have been driven largely by condo activity, as average Torontonians and Vancouverites get priced out of the single-family-home market.
Over the past 10 years, 73% of Vancouver's new housing construction has been multiple housing units, compared with 63% in Toronto.
