The demand for rental units in Toronto is gradually curbing as the supply of condos has increased. According to a CIBC report, this will likely lead to an impending adjustment in the city’s high-rise market.

In The Many Faces of the Canadian Housing Market, CIBC economists Benjamin Tal and Andrew Grantham discuss the excess supply of condos and the possible increase of purpose-built rental units.

Recently, the number of available condo units in Toronto helped create affordability for first-time home buyers who found the low-rise market to be increasingly pricey.

“In this sense, the condo market is acting as a stabilizing, rather than destabilizing, force on the market as a whole,” Tal and Grantham stated in the report. “But is it too much of a good thing?”

The authors are referring to the long list of new condo developments in Toronto since 2007. Since then, almost all of the city’s growth in rental units has come from condo rentals, as demand stayed elevated thanks to condos’ relative affordability compared to houses.

According to the authors, however, this will soon change, as Toronto’s housing demand peaked in 2012 and is slowly curbing.

“Based on demographics, we estimate that demand for rental units in the GTA will average 12,000 a year in 2015 and 2016. And that could fall a little short of upcoming supply,” wrote Tal and Grantham. “According to different sources, we estimate that the supply of rental condo units will top an annual average of 14,000 units in 2015 and 2016 – suggesting excess supply of just over 2,000 units a year.”

The market has already experienced some moderation with a plateau in rent inflation and the lease-to-listing ratio dropping to 64.3 per cent from 70 per cent in 2014. These numbers can cause trouble for investors planning on renting out suites, whom CIBC analysts estimate are responsible for 70 per cent of presales and 50 per cent of final sales.

“That’s where the vulnerability is. We estimate that roughly half of the stock of rental units belong to this category. To the extent that higher rates and/or lower rent inflation challenge the economics of rent, we might see a wave of sales in the resale market that will directly compete with the upcoming influx of new units,” said Tal and Grantham in the report.

In addition, purpose-built rental construction has seen a resurgence, with institutional groups financing apartment construction. CIBC estimates an increase in purpose-built rental supply for 2017.

Tal and Grantham believe that high-rises will face an adjustment, but that it will be due to “the degree of integration and coordination between condo rental activity and the upcoming increased supply of purpose built projects.”

CIBC’s report also states that it doesn’t believe an increase in interest rates will cause a surge in defaults, but it could cause a drag on economic activity overall due to decreased consumer spending and could also impact job creation in real-estate related sectors.