Toronto Condo and Real Estate Blog

Resales Edging Lower

Sales under the Multiple Listing Service (MLS) will amount to 81,000 in 2007 – down 3.6% from 2006. Total sales will remain near record levels, but it is important to note that the sales cycle has matured. Over the next few years, Toronto real estate sales will dip below 80,000 and move closer to the longer term average. More moderate employment growth and increased home ownership costs are the key factors influencing maturing demand for existing homes.

Fewer First-Time Buyers

Pent-up demand for ownership housing, which developed during the period of below average economic growth in the early to mid-1990s, has largely been satisfied. First-time buyers accounted for a large proportion of this pent-up demand. High home prices and increased borrowing costs have pushed the average owner’s monthly payment (i.e. principal and interest) higher. Some households, especially those considering their first home purchase, will put their decision to purchase on hold.

The impact of rising ownership costs on first-time buyers is evident through the results of CMHC’s annual Consumer Intentions to Buy or Renovate Survey. In 2002, three-quarters of households intending to purchase a home were living in rental accommodation, with the majority likely being first-time buyers. Since the beginning of the new millennium, the situation has changed. Only 50% of households intending to purchase a home in 2006 were living in rental housing.

Fewer first-time buyer intentions indicate that a smaller share of new households forming in the Toronto CMA will live, at least initially, in ownership housing. The spread between the average owner’s monthly principal and interest payment and the average monthly rent has increased substantially over the past two years. Going forward, more households will choose to rent before making the move to home ownership.

More Supply, Lower Price Growth

While Toronto MLS sales have reached a plateau and will decline over the next year, the number of new listings will continue to grow in 2007. Home owners will list their homes in greater numbers in order to take occupancy of completed new homes or to trade up on the strength of strong equity gains experienced since the late 1990s. More listings relative to sales will result in more choice for buyers.

The sales-to-new-listings ratio measures the balance between demand and supply. Generally speaking, a ratio of above 55 to 60% for a sustained period of time points to seller’s real estate market conditions. A seller’s market is characterized by price growth well above the rate of inflation, with multiple bids on homes becoming more common. A ratio below 55% is consistent with more balanced market conditions.

From 2003 onward, growth in Toronto listings has outstripped sales. The sales-to-new-listings ratio has edged below 55%, indicating more balanced real estate market conditions. The downward trend will continue in 2007.

Annual price growth will start to moderate and move closer to inflation. The average MLS price will increase 3.7% to $365,000 next year. This growth rate will be down from 4.7% in 2006.
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Lower Housing Starts

The real estate market in the Toronto Census Metropolitan Area (CMA) is at the mature stage of the market cycle. The downward trend for new home construction will continue through 2007. With a forecast total of 36,400 new home starts will move closer to the long-term average of approximately 30,000 observed between 1980 and 2006.

Ground-oriented home construction, particularly in relation to single and semi-detached houses, will continue to be the primary driver of reduced building activity. The number of condo units breaking ground will remain in line with the record and near-record levels experienced over the past two years.

Less Spill-Over from Resale Market

The tight seller’s market conditions experienced for existing homes over the past decade have moderated.

With more choice, a larger share of Toronto condo and home buyers will meet their housing needs through the purchase of a resale home. Consequently, fewer buyers will start their home search in the new home market. The impact of less spill-over demand has largely been felt in relation to new low-rise home sales, which declined by 12% through August compared to the first eight months of 2005.

High-rise condo sales have been running slightly higher than last year, with an increase of almost 2%. Fewer total new home sales this year will translate into lower housing starts next year and beyond, as the lag time between sale and start of construction often extends beyond one year’s time.

High Cost of Construction

Rising construction costs have resulted in high new home prices. As the demand for new homes has remained above average over the past ten years, Toronto builders have been faced with escalating prices for land, labour and materials. In order to remain profitable, builders have had to pass on increased costs to home buyers in the form of higher advertised prices at sales centres.

While most households would like to purchase a single-detached home, high home prices have prompted many buyers to purchase a less expensive semi-detached house, town home or condo. Multiple-family home types, including condos, will continue to account for approximately two-thirds of new home construction in 2007 – a much higher share than what was experienced earlier in the current new home construction cycle.

Spotlight on Toronto Condos

The condo is the most popular type of multiple-family home being  constructed in the Toronto area. The great majority of condo construction will be focussed in the City of Toronto next year and into 2008, with over 70% of pre-construction high rise sales in 2005 and 2006 occurring in this area.

The Former City of Toronto on its own will account for at least half of total condo starts in the metropolitan area. Outside of the City of Toronto, the established high-density node of Mississauga City Centre and certain areas in York Region will continue to experience substantial levels of condo construction.

The Investment Scene

Increased sales and construction of condo units has raised questions regarding the level of investor ownership and, by extension, price speculation that exists in the Toronto condo market.

The share of existing condos that are tenant as opposed to owner-occupied is a good indicator of investor activity. CMHC’s 2005 Condominium Survey for the Greater Toronto Area indicates that the share of rental units, at slightly less than 19%, is currently at very low levels. In contrast, in 1995 over 30% of the Toronto condo stock was investor held.

Speculative activity in the Toronto condo market is low relative to the peak of the last housing market cycle in the late 1980s and early 1990s. Between 1995 and 2003, many rental condos were sold as investors took advantage of capital gains resulting from robust annual price growth. A combination of slower price and rent appreciation and competition from other asset classes, including equities, has kept investor activity flat over the last three years.

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OTTAWA, February 20, 2007 — Three-quarters of all respondents to the 2006 Mortgage Consumer Survey conducted by Canada Mortgage and Housing Corporation (CMHC) indicated that their goal is to pay off their mortgage as quickly as possible. Moreover, half agreed that, whenever possible, they would use extra money to pay down their mortgage.

“This study suggests that Canadians are fundamentally cautious when it comes to their mortgage debt,” said Pierre Serré, Vice-President, Insurance Product and Business Development. “This is particularly true among young first-time home and condo buyers.”

The survey also indicates that Canadians are well served by the mortgage industry with an overall satisfaction rate of 84%. When asked about their preference for a mortgage provider, 86% of respondents indicated that it is somewhat or very important that their lender be a Canadian institution.

Relationships with their current financial institutions are very important to recent mortgage consumers. While 2006 has seen a slight increase in the percentage of consumers who switch to another financial institution when renewing their mortgage, the majority of mortgage consumers remain loyal to their current lender.

Although the proportion of purchasers using the services of mortgage brokers has remained unchanged from last year’s level of 27%, the percentage of consumers who turn to mortgage brokers for renewal and refinance transactions increased in 2006.

A growing majority of Canadians (71%) who refinanced their mortgage in the last year did so before the scheduled renewal time. Among those who refinanced, the most common reason was for home renovations and improvements, followed by reducing their overall interest costs.

CMHC’s Mortgage Consumer Survey is conducted each fall to examine consumer behaviour, attitudes and expectations when acquiring, renewing or refinancing a mortgage. The survey is based on a national probability sample of active mortgage consumers comprised of first-time buyers, repeat buyers, mortgage renewers and refinance consumers. The results for the entire sample are accurate within 2.1% points 19 times out of 20.

As Canada’s leading mortgage insurer, CMHC shares a wealth of knowledge and housing expertise for the benefit of Canadians. CMHC’s mortgage insurance has opened doors for millions of Canadians, giving them the assurance and piece of mind that comes with homeownership.

As Canada’s national housing agency, Canada Mortgage and Housing Corporation (CMHC) draws on 60 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable homes — homes that will continue to create vibrant and healthy communities across the country.

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