Doug Alexan­der – Bloomberg

A sliver of land wedged between Toronto’s ele­vated express­way and an off-ramp that pumps traf­fic into down­town may become the epi­cen­ter for a Cana­dian hous­ing bubble.

In four years, this site that’s now used as a park­ing lot and police impound near the shores of Lake Ontario will be home to Ten York, a 75-story glass build­ing that would be the country’s third-tallest condo tower.

Toronto has more sky­scrap­ers and high-rises under con­struc­tion than any North Amer­i­can city — almost three times as many as New York — stok­ing debate on whether the con­do­minium mar­ket in Canada’s largest city is headed for a U.S.-style cor­rec­tion as prices rise and house­hold bor­row­ing hits a record. Cana­dian lenders includ­ing Toronto-Dominion Bank last week raised mort­gage rates to cool off the hous­ing market.

“Condo con­struc­tion has always been rather prone to boom and bust cycles, and this one seems par­tic­u­larly strong,” said Sheryl King, an econ­o­mist with Bank of Amer­ica Mer­rill Lynch in Toronto. “Builders seem to over­es­ti­mate how much demand is going to be out there, and that’s when you tend to see some abrupt pull-back.”

Canada’s hous­ing mar­ket is about 10% over­val­ued, with inflated prices pri­mar­ily in Van­cou­ver, Mon­treal and Toronto, King said in a tele­phone inter­view. “We would call it a bub­ble,” she said.

Com­ment: And they would be wrong. Read below for proof.

Mort­gage Lend­ing Expands

Ris­ing home prices have led to a 53% increase in res­i­den­tial mort­gage credit in the past five years, or an aver­age rate of 8.9% a year. The vol­ume of out­stand­ing mort­gages rose to $1.08 tril­lion as of August, accord­ing to the Cana­dian Asso­ci­a­tion of Accred­ited Mort­gage Pro­fes­sion­als. Defaults remain low, at 0.42%, accord­ing to data from Canada Mort­gage & Hous­ing Corp., a government-run hous­ing agency.

Com­ment: But that makes per­fect sense. Sales vol­ume is increas­ing every year, as is the aver­age price. It would only make sense that the total vol­ume of mort­gage lend­ing would rise as well.

The country’s finan­cial author­i­ties have become increas­ingly vocal about the hous­ing mar­ket. The heads of Bank of Mon­treal and Royal Bank of Canada (RY); the country’s bank­ing reg­u­la­tor, and Bank of Canada Gov­er­nor Mark Car­ney have all expressed con­cerns about the condo mar­kets in recent months as cranes and con­struc­tion crews swamp Toronto.

Toronto has 148 high-rises and sky­scrap­ers being built, com­pared with 59 tall build­ings for No. 2-ranked New York City, and 22 in Chicago, accord­ing to Empo­ris, a Hamburg-based build­ing data company.

Trump Toronto

Most of the work is for hous­ing, with 105 res­i­den­tial high– rises pro­posed or under con­struc­tion, accord­ing to a data­base by Sky​scrap​er​Page​.com. Four­teen are slated to fin­ish this year, includ­ing two hotel-condos. Trump Inter­na­tional Hotel & Tower Toronto, Canada’s tallest res­i­den­tial build­ing, opened Jan. 31, adding 118 lux­ury res­i­dences to the city’s inventory.

“The num­ber of units under con­struc­tion is quite high, start lev­els have trended up, and the num­ber of units com­ing to com­ple­tion is grow­ing,” said Shaun Hilde­brand, a senior mar­ket ana­lyst for the Greater Toronto Area with Canada Mort­gage & Hous­ing Corp. “Sup­ply at all ends of the devel­op­ment process is grow­ing quite quickly.”

A record 27,504 condo units in the City of Toronto were under con­struc­tion at the end of last year, accord­ing to Cana­dian Mort­gage & Hous­ing annual data, adding to the city’s total of 199,000 units.

“If builders stopped build­ing today, there’s five years worth of sup­ply that is about to be deliv­ered, rel­a­tive to what nor­mal pop­u­la­tion growth is,” Bank of America’s King said.

Rates to Rise

Investors are pil­ing into Toronto’s condo mar­ket because of cheap bor­row­ing costs and that may become risky when inter­est rates rise, said John Andrew, a real estate pro­fes­sor at Queen’s Uni­ver­sity in Kingston, Ontario.

Com­ment: No, they are not buy­ing because rates are low. They have been buy­ing Toronto con­dos for more than a decade now, with mort­gage rates rang­ing from over 8% down to 2.25% for vari­ables rates pre­vi­ously. They are buy­ing here because it is a good investment.

“They’re being bought because the inter­est rate is very low,” Andrew said in a tele­phone inter­view. “They’re financed to the hilt, so they’re very sen­si­tive to the refi­nance risk when the loans come up.”

Com­ment: Not true. For­eign investors must put down 35% to pur­chase new con­dos, so they actu­ally have a lot of equity in their con­dos. They are cer­tainly NOT financed to the hilt.

Banks are also cut­ting their fund­ing costs by sell­ing cov­ered bonds, a form of cor­po­rate bond backed by assets such as home loans. Bank of Mon­treal and Bank of Nova Sco­tia sold $4.5 bil­lion of the secu­ri­ties last month, after a record $25 bil­lion of sales in 2011. Rel­a­tive yields on the cov­ered bonds fell to 130 basis points on Feb. 9, down from 170 at the start of the year, accord­ing to Bank of Amer­ica Mer­rill Lynch data.

The Bank of Canada has held its bench­mark lend­ing rate at 1% since Sep­tem­ber 2010 and will prob­a­bly main­tain that level until the sec­ond quar­ter of 2013, accord­ing to median fore­casts from econ­o­mists com­piled by Bloomberg. Car­ney has said “excesses may exist in cer­tain areas” of Canada’s hous­ing market.

Mar­ket Overshoot

“The ele­vated lev­els of ‘mul­ti­ples’ inven­to­ries, the ample pipeline of devel­op­ments under­way, and heavy investor demand (much of it for­eign) rein­forces the pos­si­bil­ity of an over­shoot in the condo mar­ket in some major cities,” Car­ney said in a June 15 speech in Vancouver.

Investors are under­es­ti­mat­ing the poten­tial impact of the surge in condo sup­ply com­ing onto the mar­ket in the next 12 to 24 months, accord­ing to King. That could drive down resale prices and rents, even with low inter­est rates and a sta­ble mort­gage fund­ing market.

Com­ment: We have been hear­ing this here in Toronto for more than 10 years now. Trust me, it is not going to col­lapse. The condo mar­ket is the new rental mar­ket. With 100,000 new­com­ers to Toronto every year, never mind uni­ver­sity grads and other first time owners/renters – there is a steady sup­ply. Rents have been stag­nant for years now, it has not slowed any­thing down.

“Investors are a con­cern given rental rates no longer fully cover costs and unit price increases going for­ward will not likely pro­vide suf­fi­cient return,” the Office of the Super­in­ten­dent of Finan­cial Insti­tu­tions said in a June draft report obtained last month by Bloomberg News through an Access to Infor­ma­tion request.

Com­ment: Again, with 35% down, the monthly car­ry­ing costs are low, mak­ing it easy to have rents pay the bills.

For­eign Buyers

For­eign buy­ers are also affect­ing hous­ing, accord­ing to OSFI. The bank reg­u­la­tor has been mon­i­tor­ing the impact of for­eign invest­ment on the hous­ing mar­kets in Toronto and Van­cou­ver, the doc­u­ments obtained by Bloomberg show. Author­i­ties in China, Hong Kong and Aus­tralia have recently taken mea­sures to cool off their res­i­den­tial real-estate mar­kets, the doc­u­ments note.

“The sta­bil­ity of Canada has moved it to the fore­front of investor pref­er­ence, in some cases ahead of the U.S.,” states a draft analy­sis of Toronto’s condo mar­ket.

Investors rep­re­sent a “sig­nif­i­cant por­tion” of Toronto’s condo mar­ket, with 20% to 30% or higher for some projects, the report said.

Com­ment: A num­ber that no one knows, it is all just a guess. And I have heard guesses rang­ing from 20% to 65% – which is a HUGE vari­ance. And it does not even mat­ter, really. Why do we care if own­ers live in their units or rent them out?

High-rise homes reached a record 62% of all new home sales last year as con­dos out­sold tra­di­tional detached homes three to one, Real­Net said in a Jan. 20 report with the Build­ing Indus­try and Land Devel­op­ment Asso­ci­a­tion. That’s up from 25% of the mar­ket in 2000.

Demand Won’t Fall

“In absence of another reces­sion, we’re not expect­ing demand to fall,” Cana­dian Mortgage’s Hilde­brand said. “We’re expect­ing it to hold steady so long as the econ­omy holds steady.”

Toronto is home to about 2.5 mil­lion peo­ple — more than dou­ble that includ­ing its sub­urbs — and accounts for about 11% of Canada’s eco­nomic out­put, accord­ing to the City of Toronto. The city is home to Canada’s five-biggest banks, two of the three largest Cana­dian insur­ers as well as some of the country’s largest pen­sion funds, asset man­agers and finan­cial– ser­vices firms.

Real­tors and oth­ers in the indus­try say the record condo units under con­struc­tion will be eas­ily absorbed by 100,000 immi­grants stream­ing into the city each year, wealthy for­eign investors look­ing for a haven to park their money and young urban­ites demand­ing to work near the finan­cial indus­try that is the back­bone of the city’s economy.

Com­ment: My god, that is the best one-paragraph sum­mary of the health of our condo mar­ket I have ever read!

‘Good Place’

“There are rea­sons why peo­ple want to spend time in Toronto, and that’s part of what sup­ports these real-estate mar­kets,” said William Strange, Rio­Can Real Estate Invest­ment Trust Pro­fes­sor of Real Estate and Urban Eco­nom­ics at Rot­man School of Man­age­ment in Toronto. “Toronto tends to be a pretty good place to do busi­ness and, with respect to Canada, it also tends to be a place where peo­ple want to live.”

Tridel, Toronto’s biggest condo devel­oper, is already field­ing calls for the 783 units of Ten York and plans to start sell­ing in April, more than a year before the C$295 mil­lion project begins construction.

“There’s a tremen­dous amount of inter­est,” said Jim Ritchie, senior vice pres­i­dent of sales and mar­ket­ing for Tridel. “We have thou­sands of names of peo­ple who want to buy here.”

Devel­op­ers sell most units of a project before build­ing begins, and many investors buy the con­dos to either resell or rent out when the con­struc­tion is fin­ished. Rental units accounted for 24% of all con­dos in Toronto last year, up from 21% in 2010, accord­ing to CMHC.

Com­ment: Another guess.

Vacancy Rates

A total 8,250 condo apart­ment rental units were added to Toronto last year, CMHC said. The aver­age vacancy rate for Toronto rental con­dos was 1.3% last year, down from 2% in 2010.

Com­ment: And that is an astound­ingly low vacancy rate – which is why investors buy con­dos to rent them out. The Cana­dian aver­age vacancy rate is around 2.2%, almost 70% higher than Toronto’s rate.

Toronto’s ris­ing prices for town­houses and single-family homes are dri­ving more home­buy­ers into con­dos. In Jan­u­ary, the aver­age price for a detached home in Toronto was $743,993, up 15% from the same month in 2011, accord­ing to Toronto Real Estate Board. The aver­age price for a condo was only $343,835, up 5%.

U.S. hous­ing prices plunged by a third between the peak of July 2006 and Novem­ber 2011, accord­ing to S&P/Case-Shiller Composite-20 Home Price Index (SPCS20). By com­par­i­son, Cana­dian hous­ing prices rose 32% in the same period, accord­ing to the Teranet-National Bank National Com­pos­ite House Price Index.

Com­ment: Our econ­omy did bet­ter and stayed strong as well. Our banks are solid, the sys­tem is secure and safe. That is why there is a lot of for­eign money here, it is a great place to invest.

No Bub­ble

Toronto isn’t fac­ing a bub­ble because price increases have been steady, said Ben Myers, exec­u­tive vice pres­i­dent of Urba­na­tion, a Toronto-based real-estate research firm.

“We’ve seen the same level of increase in the mar­ket year-over-year in terms of index pric­ing in 10 of the last 15 years,” Myers said. “If we didn’t have an explo­sion of the bub­ble in those years, I’m not sure what would cause it to hap­pen now.”

Com­ment: But a slow increase, year after year, is the very oppo­site of bub­ble. And that is why we do not have one. When prices rise 5–9% every year for 15 years, that is just a slow and steady rise, NOT a bubble.

The hous­ing gains have sparked wor­ries that CMHC, Canada’s fed­eral mort­gage agency that insures some mort­gages, is becom­ing over­ex­posed to a poten­tial slump, leav­ing tax­pay­ers at risk.

Com­ment: If, and only IF, there is a major mar­ket cor­rec­tion. With no cat­a­lyst for such a col­lapse, the wor­ries are unfounded. We would need unem­ploy­ment to sky­rocket (even though it is down from the 8.x% range to 7.6% over the past year or two), plus inter­est rates to jump (though we are at record lows with the prime rate not set to change for over a year) com­bined with real estate prices to go through the floor (which would be hard with prices ris­ing nation­ally around 3% per year and around 9% annu­ally in Toronto). Just ain’t gonna hap­pen folks.

Cana­dian Mort­gage & Hous­ing said Jan. 31 that it’s rationing mort­gage insur­ance for lenders as the hous­ing agency approaches the C$600 bil­lion legal limit for back­stop­ping the loans. Lenders have increased their demand for insur­ance of their mort­gages amid “liq­uid­ity needs” since the 2007 finan­cial cri­sis, CMHC said.

Lenders are becom­ing “increas­ingly lib­eral” with mort­gages that don’t require bor­row­ers to ver­ify income, OSFI said in the doc­u­ments obtained by Bloomberg News.

Com­ment: That is NOT TRUE at all. It is the oppo­site. Banks are tight­en­ing up and are get­ting in trou­ble because some self-employed and new immi­grants are hav­ing trou­ble get­ting mort­gages. We are mak­ing the sys­tem tighter, not looser by any stretch. And any mort­gage changes would be the 4^th change to make the rules stricter. Trust me, our bank­ing sys­tem only gets more restrictive.

Finance Min­is­ter Jim Fla­herty said that he’s con­cerned about loos­en­ing of stan­dards by some Cana­dian finan­cial insti­tu­tions on those types of mort­gages, and steps are being taken to “cor­rect” the practice.

Tight­en­ing Standards

Toronto-Dominion Bank (TD) Chief Exec­u­tive Offi­cer Edmund Clark said in a Feb. 8 inter­view at Bloomberg’s New York head­quar­ters that banks are tight­en­ing lend­ing on loans for con­do­mini­ums. Toronto-Dominion, Royal Bank of Canada and Cana­dian Impe­r­ial Bank of Com­merce scrapped their pro­mo­tional 2.99 per­cent mort­gage rates last week, less than a month after they were introduced.

Com­ment: Which had noth­ing to do with con­dos. It was basi­cally a “sale” the banks had. Now it is over.

“Banks are lean­ing against it in the condo mar­ket right now and lean­ing against it in the unse­cured lend­ing mar­ket and just a gen­eral lean­ing against bor­row­ing,” Clark said. He said the changes may lead to a “suc­cess­ful soft land­ing” for the hous­ing market.

The gov­ern­ment has already taken mea­sures to restrain the hous­ing mar­ket, includ­ing reduc­ing amor­ti­za­tions and requir­ing stricter cri­te­ria for mort­gage qual­i­fi­ca­tions. Hous­ing price gains have slowed in the past three months.

Com­ment: But even with those 3 changes, prices and sales vol­ume keep rising…

Still, hous­ing mar­kets in Van­cou­ver and Toronto have become “severely unaf­ford­able,” accord­ing to a Jan­u­ary report by Demographia, a pub­lic pol­icy firm.

Com­ment: Van­cou­ver is way out of whack, but Toronto still has houses for less than $300k. The mort­gage on that is less than $1,250 a month with 5% down. That is VERY afford­able. Peo­ple just want to live in the chic or cool areas – and they cost more. But there are tons of per­fectly accept­able neigh­bour­hoods that your aver­age per­son can afford.

Unaf­ford­able

Vancouver’s median home price of $678,000 in the third quar­ter was 10.6 times its median pre­tax house­hold income of $63,800, mak­ing the city the least-affordable hous­ing mar­ket after Hong Kong among large English-speaking cities, Demographia said. Toronto’s home price of $406,400 was 5.5 times house­hold income of $73,600, a 40% dete­ri­o­ra­tion in afford­abil­ity since 2004.

Fall­out from Toronto’s con­struc­tion boom may not sur­face imme­di­ately, accord­ing to Queen’s University’s Andrew.

“It’s going to be three-and-a-half to four years from now when these loans are all com­ing up and you’ve got a num­ber of peo­ple who say they can’t afford to refi­nance it, so they’ll just sell,” Andrew said. “They’ll find out that 40 units in the build­ing all went on the mar­ket in the same month, and now they’ve got a big problem.”

Com­ment: Horse pucky. Every newly com­pleted condo has a ton of units on the mar­ket. They all sell, or they find ten­ants and keep them. The condo boom has been going since about 1998, this is not new, we have seen this all before, year after year.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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