Bloomberg News

Toronto condo builders are slow­ing devel­op­ment in a bid to avoid a crash after a decade-long boom led to 159 tow­ers now under construction.

Com­ment: Are they slow­ing down for that rea­son, or are you just cre­at­ing a newsy head­line? Have builders told you this? No? Ah right, so it could just be a lull, a sea­sonal thing. Maybe because of the ter­ri­ble weather we had all of the first part of this year? Maybe the city was slow with per­mits? Could be 100 dif­fer­ent rea­sons, but you are going to spec­u­late the worst rea­son you can think of so that the news looks bad. Nice…

So far this year, they’ve announced 13 new con­do­minium projects, the fewest since the reces­sion in 2009, when there were just three over the same period, fig­ures from real estate researcher Real­Net Canada Inc. show. In the same period last year, 29 new projects were announced, includ­ing Tridel Corp.’s Ten York, the third-tallest res­i­den­tial tower in the coun­try at 75-stories when it was first marketed.

Com­ment: Q1 2012 had 20 degree weather on Feb­ru­ary – we have feet of snow the same time this year. If you don’t know that real estate is weather-dependent, then you have no right writ­ing real estate stories.

“Most devel­op­ers have their hands in their pock­ets right now,” said Brad Lamb, pres­i­dent of Brad J. Lamb Realty Inc., a devel­oper and the city’s largest con­do­minium bro­ker. His firm, which is mar­ket­ing more than 45 high-rise devel­op­ments in the city, won’t start a new project until 2014, Lamb said in an inter­view at Bloomberg’s office in Toronto. Lamb said he has eight projects in Toronto and Ottawa “on the draw­ing board.”

Com­ment: Yet he did not say that he was not build­ing because he was afraid and was try­ing to avoid a crash. Does Mr. Lamb know you put those words in his mouth, by impli­ca­tion? I would think he would not like that very much.

The slow­down comes as a near-record sup­ply of con­dos comes to mar­ket in a city with the most tow­ers being con­structed in the world, accord­ing to BuzzBuz­zHome, a Toronto-based real estate list­ings and research firm. Devel­op­ers are try­ing to man­age the slow­down as buy­ers retreat amid tighter mort­gage rules, a slow­ing econ­omy and the bur­den of record con­sumer debt.

Com­ment: Comes to mar­ket? You mean com­plete. That means that units that are already BOUGHT AND PAID FOR are done and peo­ple take pos­ses­sion of them. They are not being offered for sale and flood­ing the mar­ket. Fig­ures from Real­net, who you quote above, show that around 10% of new con­dos are offered for sale once the own­ers take title. So even a heavy year like 2013 will be, with some 28,000 com­ple­tions, will see around 2,800 new list­ings added to an annual sales total of around 85,000. So maybe 3% more… wow… so much extra inven­tory, what will we ever do?

The sup­ply of new high-rise units reached 21,262 in Feb­ru­ary, 34% more than the same period a year ago and close to a record 21,696 in Octo­ber 2012, Real­Net fig­ures show. About 61,000 units are cur­rently under con­struc­tion — the most ever — and a record 35,757 res­i­den­tial units will come on stream next year, Real­Net said.

Com­ment: Clar­ify your data. Are there 21,262 new con­dos cur­rently for sale? And the 35,757 com­ing “on stream” – what does that mean? Built? Sold? Offered on MLS? You are throw­ing around num­bers that mean noth­ing. Like 61,000 units for sale. It can take 3 years or more for a large tower to be built, once ground is bro­ken. Those 61,000 units could com­plete this year through to 2016 or beyond. It means nothing.

Can­celed lumen

Devel­oper Con­cord Adex post­poned its pre­vi­ously announced Lumen this year, a 30-story build­ing in a clus­ter of con­dos near the Gar­diner Express­way, a major high­way that con­nects the west­ern sub­urbs with the city, accord­ing to BuzzBuzzHome.

Com­ment: Why did they can­cel it? No sales? Crappy design? Bed­rooms with cars zoom­ing past the win­dows? Did they need 38 storeys to make finan­cial sense and the city would only approve 30 storeys? You can­not sim­ply through stuff like this around with­out con­text. Unless you are just try­ing to write a neg­a­tive story.

Menkes Devel­op­ment Ltd was one of the first to announce this year, putting its 29-story 365 Church devel­op­ment on sale for pur­chase in March. Due for com­ple­tion in 2017, unit size starts at 323 square feet among the small­est in the city.

“Condo prices are not going up now the way they have been,” said Finn Poschmann, vice pres­i­dent of research at the C.D. Howe Insti­tute in Toronto. “From the devel­op­ers’ side, they’re say­ing, ‘OK, enough is enough right now. We’re digest­ing a shift in the mar­ket as it is, and we really don’t need to be beat up more.’”

Com­ment: Builders have real­ized that they have hit the wall in terms of what first time buy­ers and investors will buy. But they are shrink­ing units, which pushes up the cost per square foot. Trust me, con­dos are not going down in price any time soon.

Sales drop­ping

Sales of high-rise homes in the city have dropped 34% since 2011 after ris­ing 64% in the past decade until 2012. Prices have declined 5.5% over the past two years, accord­ing to RealNet.

Com­ment: New con­dos we are talk­ing about here, let’s be clear. And if there are a record num­ber of com­ple­tions, how could there be less sales? More com­pleted con­dos means more were bought. And tak­ing a slice out of a longer term is cherry pick­ing the data. Your two data sets over­lap – how could sales drop from 2011–2013 when sales rose from 2002–2012? If sales rose in 2011 and 2012, how did they drop? Your math makes no sense…

Sales are weak­en­ing after the gov­ern­ment tight­ened mort­gage rules to curb record house­hold debt and orches­trate a so-called “soft land­ing” in the hous­ing mar­ket. Bench­mark inter­est rates held at 1% since 2009 in the longest pause since the 1950s stoked a hous­ing boom. The gov­ern­ment has been try­ing to rein it in, short­en­ing amor­ti­za­tions in June to 25 years from 30 years, the fourth time in four years it tight­ened home loan reg­u­la­tions. The Office of the Super­in­ten­dent of Finan­cial Insti­tu­tions also intro­duced tougher stan­dards for lenders.

Com­ment: And it worked – sales fell around 10–15%. But once we hit July and have two months with the same mort­gage rules, we will not be talk­ing about less sales any­more. The funny part is that num­bers will prob­a­bly rise again through the end of next year and will look strong against the weaker 2012 num­bers. And the press will go on about ris­ing sales – just as they did about the drop­ping sales – with no con­text. Mark my words!

The gov­ern­ment has also pres­sured banks not to cut home loan lend­ing rates below 3%, with Finance Min­is­ter Jim Fla­herty say­ing March 19 that “we don’t want a race to the bot­tom on mort­gage rates.” Man­ulife Finan­cial Corp. with­drew a pro­mo­tional 2.89% five-year fixed mort­gage rate after the finance depart­ment called the bank to express the minister’s “displeasure.”

Com­ment: No, Fla­herty did not tell banks to stay above 3% – he just said he was not happy when BMO offered the lower rate. They responded by offer­ing 2.79% to their best clients, secretly. And I have seen ads in CIBC offer­ing 2.99% mort­gages with 3% cash back.

Gov­er­nor warns

The effect of the government’s focus on rates and bor­row­ing was that many first-time home buy­ers were priced out of the mar­ket and grew cau­tious as Mark Car­ney, the Bank of Canada gov­er­nor, empha­sized the risk to an over-heated hous­ing mar­ket, Poschmann said.

“Every­one knows that soft land­ings are dif­fi­cult to nego­ti­ate,” Poschmann said. “So you use mul­ti­ple tools, you push on mul­ti­ple but­tons, and that’s what the gov­ern­ment has done.”

Com­ment: And finally one worked. But most first-timers will just wait and save more, or buy some­thing dif­fer­ent, or look out­side the 416.

Investors are begin­ning to hear about the high amount of sup­ply and are back­ing off, Will Dun­ning, pres­i­dent of real estate mar­ket analy­sis firm Will Dun­ning Inc., said in a phone inter­view from Toronto. The government’s mort­gage tight­en­ing has taken at least a quar­ter of con­do­minium buy­ers off the mar­ket, he said.

Com­ment: No, they cer­tainly are not. Why would they? Not when they can buy a condo and have a line up to rent it out. Vacancy rates are like 0.8% now, there are bid­ding wars on rentals. Land­lords have their pick of ten­ants. This is exactly what investors want. I have heard from builders that they are bang­ing on their doors ask­ing why they are not build­ing. The buy­ers taken out of the mar­ket are first-time buy­ers, owner-occupiers, not investors.

Attrac­tive investment

“Low inter­est rates made con­dos a very attrac­tive invest­ment, I wouldn’t say a bub­ble but I would say too much activ­ity,” he said. “There are mul­ti­ple out­comes, includ­ing the investor say­ing ‘It’s time to get out of this mar­ket’ and if a lot of them say that at the same time, then you see prices fall.”

Com­ment: No bub­ble. There is no sud­den increase, in sales or prices. Prices have risen around 3–8% annu­ally since 1996 – how is that a bub­ble? And take off 2% for infla­tion, so it is more like 1–6%. Whoo. And sales have remained awfully steady for a decade now, how is that a bub­ble? Sure, more con­dos that houses, but if you can’t see the demo­graph­ics behind that, then I can’t help you.

Prices of single-family homes in the city are con­tin­u­ing to rise due to the lack of avail­able prop­er­ties and space con­straints on build­ing. Homes are at a record pre­mium of $204,000 ($200,866) to their high-rise coun­ter­parts, accord­ing to Real­Net data. Since 2009, condo prices have risen steadily 25%, com­pared to a 45% spike for low-rises over the same period.

Com­ment: The dif­fer­ence can be even higher than that. I think you are talk­ing new, since Real­net tracks new devel­op­ments. But in the resale mar­ket, con­dos are aver­ag­ing around $350–360,000 while detached homes are now over $900,000 – on average.

Still the Toronto Real Estate Board, or TREB, fore­casts the slow­est over­all growth since 2008 this year, with aver­age home prices of $515,000 in 2013, a 3.6% advance over 2012. The board fore­casts 80,000 total hous­ing sales this year, a 6.5% decline from last year and what would be the steep­est decline since 2008.

Com­ment: What? We are now call­ing “only” a 3.6% price rise a prob­lem? This is a sign of some­thign bad? Seri­ously? Peo­ple used to say 8% annual increases were a sure bub­ble, now 3.6% is a sign of mar­ket col­lapse? Really? And we tend to for­get that 2011 was a crazy year and last year would have been just as bad had the new mort­gage rules not changed things halfway through the year. If we have 80–85,000 sales, then it is right in line with the 10-year trend. Again, not the begin­ning of the apoc­olypse. Please, con­text folks. Saves me a lot of typing!

Two mar­kets

“It’s a tale of two mar­kets when it comes to price growth,” said Jason Mer­cer, head econ­o­mist at TREB. “On the low-rise side of the mar­ket it’s been extremely tight. There’s a lot of com­pe­ti­tion out there and lots of inven­tory. On the condo side, you’ve got quite a bit of supply.”

Com­ment: Yet they both sell and both increase in value over time.

The boom in some ways has helped reg­u­late the sup­ply com­ing to mar­ket, Lamb said. Devel­op­ers are all simul­ta­ne­ously build­ing a record num­ber of units, which means there isn’t enough con­struc­tion equip­ment such as cranes, or enough work­ers to go around, delay­ing sales, con­struc­tion, and occu­pancy. Devel­op­ers saw this com­ing more than a year ago, Lamb said.

That may not be enough to engi­neer a soft-landing.

“We had a hous­ing bub­ble in 1989 that burst, so there’s an exam­ple of where the gov­ern­ment pol­icy did not cre­ate a soft land­ing,” Craig Alexan­der, senior econ­o­mist at Toronto-Dominion Bank, said in a phone inter­view from Toronto. “Real estate has gen­er­ally been more volatile than the over­all econ­omy and it’s tended to under­per­form dur­ing reces­sions and then rebound early in the eco­nomic recovery.”

Com­ment: There was no gov­ern­ment pol­icy in 1989. Peo­ple went crazy spec­u­lat­ing and pushed prices up 127% in about 15 months. Then, it stopped. Dead. And prices dropped. But they never went below where they were when it began. Sure, if you bought at the peak you had to wait until about 2006 to see your house worth the same again, but that was some­thing very very dif­fer­ent than now. Peo­ple need to stop com­par­ing it. A 127% jump in a lit­tle over a year is very dif­fer­ent that 5–6% a year for a decade and a half.

Land demand

Demand for space to develop down­town remains strong. Res­i­den­tial land trans­ac­tions hit a record $2.75 bil­lion dol­lars last year, encom­pass­ing all trans­ac­tions for res­i­den­tial prop­erty, land to build res­i­den­tial prop­er­ties, and for mixed– use pur­poses, accord­ing to RealNet.

Hous­ing starts have also begun to rise again after reach­ing the low­est level in almost two years in Jan­u­ary. They rose for a sec­ond month in Feb­ru­ary to a 184,028 annual rate.

“On lower vol­ume, the hous­ing price is still creep­ing higher — in the equity mar­ket that doesn’t last, it’s a diver­gence,” said Jef­frey Burchell, fund man­ager at Aston Hill Finan­cial Inc., which man­ages $6.7 bil­lion in North Amer­ica. “You run for the hills when you see that.”

Com­ment: What? That does not even make sense to me… And why are we ask­ing an asset man­ager to com­ment on real estate? I don’t com­ment on the stock market.

Aston Hill owns shares of Inter­Rent Real Estate Invest­ment Trust, an Ottawa-based res­i­den­tial mul­tires­i­dence man­ager that owns about 4,700 units in Ontario.

“If you see the mar­ket going up on low vol­ume, you just sell every­thing and walk away for a while,” Burchell said. “It’s bizarre that hous­ing prices are still going up but volume’s down because all it does is it takes less to tip it all over.”

Com­ment: That does not make sense either. If vol­ume is down, it is because there is less sup­ply. High demand and low sup­ply means lower over­all sales. High demand and lower sup­ply also pushes prices up. I am con­fused how this is read as a bad thing.

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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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