A Soaring Condo Market in Toronto Ignites Fears of a Crash TORONTO - Sandwiched between two rail lines in this city's core, great factories once produced the finest Canada could offer the world: Magic baking powder, Brunswick bowling alley flooring and Massey Ferguson farm equipment. Those factories and many others here have been long abandoned or demolished, but the area is bustling. It is now called Liberty Village and it is packed with high-rise condominiums, largely built over the last five years, with many more still under construction. The popularity of the Liberty Village downtown condominium development is a highly visible sign that Toronto's effort to create a livable city through densely populated neighborhoods is a roaring success. Yet some Canadians see the frenzied building boom that repopulated this part of downtown Toronto and worry that it may end badly. Historically low interest rates and financially healthy banks eager to lend have spurred Canadians to shop for houses and condos. So builders built. Just over 55,000 new condo units are under construction in the city, many of them along Toronto's condo alley, which starts at Liberty Village and heads east for about three miles through the downtown core. Median condo prices have risen 25 percent since 2009. Two-bedroom condos of about 850 to 900 square feet in Liberty Village sell for about $500,000. For Toronto, this is crazy. "There is no question that the housing market in Canada is overshooting," said Benjamin Tal, deputy chief economist of CIBC World Markets. "Now the cocktail party conversation in Canada is: "Will this lead to a U.S. style crash?'" The worriers are not just on the party circuit. Last month, the Bank of Canada said that the growing inventory of unsold condos in Toronto could eventually create "the risk of an abrupt correction in prices and residential construction activity." After almost five years of growth, high-rise condo sales were down 6.4 percent in May, according to the Toronto Real Estate Board. The worry now is that prices will also start to follow a downward path. Strict mortgage rules and a centralized and conservatively managed banking system helped Canada sidestep the kind of real estate collapse that afflicted the United States in 2008. "In Canada during the recovery it was almost a crime not to take a mortgage," said Mr. Tal, who works for a unit of the Canadian Imperial Bank of Commerce, one of the five large banks that dominate the country's mortgage lending business. We were able to borrow our way out of this recession, which is why we are now sitting on this elevated debt level. Canadian politicians do not want an American-style crash here. Jim Flaherty, the finance minister, recently scolded Canadian banks for discounting mortgage rates. He has been worried that Canadian household indebtedness has risen over the last three years. His government has tightened up mortgage lending rules by, among other things, shortening the length of mortgages. Canadian banks have also kept tight rein on developers. Before developers are lent construction money, they generally must sell 70 to 80 percent of units in any project in advance. Given that, Urbanation, a company that tracks the Toronto condo industry for developers and lenders, estimates that 89 percent of the units now being built in Toronto are already sold. Buyers who do get cold feet and abandon their purchases lose their 20 percent deposits, a significant amount in a city where the average condo sales price was $372,768 in May. Ontario law also makes it easy for developers to recover the full purchase price in court. But other government entities encouraged the boom. Historically, Toronto, Canada's largest city, met its housing needs like so many North American cities - by sprawling. But when the province of Ontario designated much of the undeveloped land northeast of Toronto as a greenbelt, many developers went downtown to buy former industrial land. At the same time, buyers, particularly young ones, started to favor downtown living over long commutes on Toronto's increasingly congested roads and overtaxed subway and commuter train system. On top of that, Canada changed its immigration rules, so the 381,750 immigrants who came to Toronto from 2006 to 2011 were increasingly affluent or had wealthy relatives back in their home countries. For many of them, real estate as an investment, and condos in particular, are more attractive than low-interest bank accounts and more certain than stocks. In its report, the Bank of Canada said that it was concerned that the high level of purchases by investors may have "boosted construction in the condominium market beyond demographic requirements," an analysis disputed by Urbanation and others. Low vacancy rates in Toronto make it easy for condo owners to find renters, while resale statistics suggest that most of those investor-purchasers are holding their units for long-term gains rather than flipping them for quick profits. David Wex, co-founder and partner of Urban Capital, a developer that is building, among other things, a major project called River City at the eastern end of downtown Toronto's condo alley, remains cautious. He said that about half of the 650 units in one of his recent projects within walking distance of the city's financial district were sold to investors. But like many developers, Mr. Wex limits the number of units anyone can buy in advance of construction to minimize his risk of borrowers" defaults. "Any number of developers will tell you everything's fine, but it's a self-interested comment," Mr. Wex said. No one knows. There's no developer out there that doesn't want things to calm down a little bit. Maybe it's calmed down too much, who knows? Mr. Tal said that a gradual fall in prices through "a boring, slow slowdown" of as much as 10 percent "would be desirable." He added that "the hope is that prices will basically stagnate for four or five years." Mr. Tal, like many economists, believes that Canada will come in for a soft landing, not a crash. But Toronto's condo industry still feels uncertain. While Mr. Wex's company continues to develop in Toronto, it's also moving into Halifax, Nova Scotia, and Winnipeg, Manitoba. Those places, he said, "haven't had the crazy boom."