Who will lose their shirts when the condo bubble bursts?

If you are looking for MY QUEST FOR A CONDO, click here.

Some economists and self-proclaimed real estate experts (I'd argue that nobody is a 'real expert' on that topic) are asking: Who will lose their shirts when the Toronto condo bubble bursts?

Well, it actually really depends on WHEN and HOW MUCH the condo market bursts.

In theory you could make a mathematical equation showing what people will be most effected. It would look something like this:

Percentage of Value Lost = Number of People who purchased their condo within an allotted time before the loss based on how much their condo was worth when they purchased x the Perecentage who have "Unstable Employment" + the Percentage who "Paid Too Much" + Other mitigating factors...

Determining how to write such a complex equation and all the factors would be a serious puzzle even for a skilled mathematician, which I am not.

Here are some of the additional factors:

#1. The longer it is delayed the worst it will be when it does burst. More debts piled on to the problem will mean a deeper recession in the local economy in Toronto.

#2. How widespread the debt problems are within Toronto's middle-class (which will take the lion's share when it comes to people losing their proverbial shirts) and to what extent the lower and upper middle class will be effected.

#3. What percentage of people has an insecure job that might be cut if the economy goes sour? Also what percentage may end up having their hours cut and lose a percentage of their take-home salary?

Yada yada yada...

Earlier this week when the CMHC (Canada Mortgage and Housing Corporation) reported that construction of multiple units, such as condos, drove housing starts to an annual pace of 244,900 in April 2012, the strongest pace since September 2007 right before the real estate market in the USA collapsed.

Chief economist (and self proclaimed real estate expert) David Rosenberg recently weighed in on the topic of Toronto's condo bubble overheating.

"If you think [new] constructions are volatile on a month-to-month basis, the fact that new home starts have been rising for five months in a row (by 93% an annual rate over this time frame) may make you wonder whether the strong building momentum is sustainable or whether there is a Canadian housing bubble formation at play," said Rosenberg on May 10th.

Rosenberg, the chief economist at Gluskin Sheff + Associates, says that over the past five months construction starts for multiples such as condos have surged by 220%, at an annual pace, compared to a dip of 1% for single homes. Its highly unusual to see a huge jump in just condos and not have home construction go up at the same time unless there is some serious overheating happening.

Typically the ratio of condos to single unit houses is at its highest right before a bubble bursts.

Right now the multi-to-single ratio of starts is at its highest level since the last housing bubble popped in the early 1980s. Rosenberg says that lends weight to Toronto's bubble size as more than normal investment and speculative demand floods Toronto's condo market.

If the market was truly behaving normally then residential construction would also be high and behaving according to natural demographic demand. But the ratio is highly skewed towards condos being funded by investors hoping to flip them for a profit.

Thus it would seem only logical that it is the investors who are going to lose their shirts... except it isn't. Canadian banks and the CMHC are the ones holding the bag because many of the investors are actually foreigners using money from Canadian banks, which are ensured by the CMHC which means Canadian taxpayers will foot the bill when the condo market becomes flooded and it hurts everyone who recently bought a condo (and hurt house prices too when condos become really cheap).

"No doubt the Canadian economic backdrop is solid overall and mortgage rates are at low levels," says Rosenberg. That makes Canada an easy target for investment because its so easy to mortgage to buy a condo that isn't even built yet.

But if the condo market becomes flooded then who is going to buy all those condos when it comes time to flip them?

Rosenberg also notes that the Bank of Canada governor Mark Carney has been trying to warn people.

"But at some point, the Bank of Canada will no longer be playing the role as the boy who called wolf, and mortgage guidelines are already being tightened up," says Rosenberg in his report. "If you are in the market to buy a home, that is one thing. But the condo market - quite another. There is no timing to this except that the next [Bank of Canada] rate-hiking cycle will likely prove to be the sort of situation where the tide comes in and we see who is standing on the shore stark naked."

Or at very least who lost their shirt when the tide came in.

Depending on how badly the bubble bursts it could spell danger to anyone who bought a house too when all those cheap condos flood the market.

In which case Bank of Canada governor Mark Carney isn't really the boy who cried wolf. He's the boy who pointed out that the Emperor has No Clothes.