Bank of Canada has no worries about Toronto condo bubble bursting
June 16th, 2006The Canadian condominium market is fundamentally healthy - so don’t expect a crash any time soon, the Bank of Canada says.While there is a possibility of “imbalances” in certain markets, a “significant reversal” of condominium prices is unlikely, says the central bank in a report released yesterday.
In its Financial System Review, the bank addresses growing concern that the heated condo market is approaching bubble-like conditions.
“While there may be some risk of future downward pressure on prices in some condominium markets, overall, the risk of a broad reversal of condominium prices is limited,” it said.
The report is contrary to the analysis of some economists who have repeatedly said Vancouver with double-digit appreciation in condo values over the last several years looks frothy, while Toronto, with the highest number of condo sales in North America, was at risk of being overbuilt.
“A combination of structural and cyclical factors have contributed to the growing popularity and rising prices of condominiums,” said the report.
Rising real disposable incomes, low interest rates and tight rental markets have made ownership more attractive. Meanwhile, rising house prices have put detached dwellings beyond the reach of many buyers, particularly for first-time purchases. Condos have also been popular with small investors who want to add rental real estate to their portfolios.
Toronto housing analyst Will Dunning agrees with the substance of the report, but adds that one failing might be that it does not look at the amount of speculative buying.
“The key indicator of risk is the amount of speculative buying that is going on out there, and that’s hard to assess,” said Dunning. Speculative buying in some condos could be as high as 40%, according to some estimates.
The analyst has said in the past that there was “high risk” that the Toronto condo market is being overbuilt. More than 17,000 condos were sold in the Toronto area last year, the most on record. Some Toronto-area developers have been heaping on incentives for selling agents.
The report, however, is written from the viewpoint of assessing risk to the stability of the Canadian financial system - not whether buying a condo is a wise investment.
The requirement for developers to pre-sell a certain percentage of units, anywhere from 60% to 70% before granting financing for construction, has cut down on the possibility of defaults to banks.
Commercial bank loans to builders for residential purposes have also increased by 45% in only two years from 2003 to 2005, representing $4.4 billion. However, this accounts for a very small fraction of the loan portfolios of commercial banks, although some smaller institutions might be more heavily exposed.
More than 40% of mortgage loans for condo purchases are currently insured and thus pose “little risk for financial institutions.”
As for investor owned units, banks also generally require larger down payments for the purchase of rental condos than for the purchase of owner-occupied units, said the central bank’s report, thus the exposure of financial institutions to condominium markets is rather limited.
While banks have cut down their exposure to condo loans, some analysts have said the risks have shifted toward condo buyers who are putting up the bulk of the down payment for condos in hopes that the market will continue to appreciate.
