TORONTO -- The average sale prices of Toronto homes continued to climb in June, but rising mortgage rates and an oversupply of condos could spell trouble for the city's real estate market, according to economists.
Housing sales in the Greater Toronto Area were down by less than one per cent in June compared with the same month a year ago, according to a report by Toronto Real Estate Board released on Thursday.
But the average selling price was up by 4.7 per cent to $531,374, driven by single-detached and semi-detached houses, particularly in Toronto.
Meanwhile, home sales in Vancouver were up 11.9 per cent in June compared with a year ago, but down from the previous month.
On Wednesday, the Real Estate Board of Greater Vancouver said there were 2,642 homes sold through its Multiple Listing Service in June, up from 2,362 sales in June 2012, but down from the 2,882 sales in May 2013.
Robert Hogue, a senior economist at Royal Bank (TSX:RY), said the numbers indicate that Vancouver's real estate market is on the rebound after hitting its lowest points last year.
But economists say Toronto's market still faces some potential risks.
Adrienne Warren, an economist at the Bank of Nova Scotia (TSX:BNS), said rising mortgage rates could make single detached homes in markets like Toronto and Vancouver too pricey for first-time home buyers.
Rates have been at all-time lows since the economic downturn, but have slowly begun rising in the past two months.
"At the same time because supply is tight and unlikely to increase significantly, I think that will probably put a floor underneath how low the prices could move," said Warren.
It will all depend on how quickly and dramatically bond yields rise, said Hogue.
"If (the current) rate of increase is sustained for another month or two, that could put a bit more stress on the housing market," said Hogue.
"If those bond yields stabilize and interest rates don't necessarily surge, then the market may take it in stride."
Canadian home buyers may be caught off guard when mortgage rates go up. A recent Bank of Montreal survey found that one-third of first-time home buyers expect interest rates to stay the same over the next five years.
However, Warren said a bigger challenge for Toronto's real estate market will be to absorb all of the new condominiums that will be coming onto the market in 2014 and 2015.
"There's definitely a risk that condo prices, which have essentially levelled off, could be under downward pressure over the next couple of years," said Warren.
David Madani, an economist at Capital Economics, said fluctuations in the condo market could also reverberate throughout the rest of the real estate sector.
"If you own a condo and you want to sell it and you can't, then that means you can't buy the single-detached home that you really want," he said.
"There are definitely linkages between the condo market and housing more generally. Sales in one market can affect sales in other markets."
The Toronto Real Estate Board report found that average condominium sale prices remained in line with 2012 levels in June. Meanwhile, new listings were down more than sales, which the board says suggested that market conditions became tighter.
The report's breakdown by market segment showed that detached home sales in Toronto's 416 area code were down 6.9 per cent at 1,137 in June, but the average price was up 8.1 per cent at $866,326.
That compared with a 3.2 per cent increase in sales to 3,411 in the surrounding 905 area, where year-over-year prices were up 4.9 per cent at $598,708.
