Condo owners are end-users
By Jason Mercer - National Post
As it is still early in 2007, I thought this would be a good time to review new home construction over the past year in the greater Toronto area. Also, drawing from Canada Mortgage and Housing Corp.’s 2006 Rental Market Survey, I will point to some interesting trends in the condominium apartment market, both from the perspective of the owner-occupant and the investor.
Construction started on a total of 37,080 new homes last year in the Toronto Census Metropolitan Area (CMA), representing an 11% decline when compared with 2005, a continuation of the downward trend in housing starts that began about 2003.
Beginning in 2003, annual growth in existing home listings started to outstrip growth in sales, which meant home buyers had more choice and so, many purchased a resale home. Interest in certain segments of the new-home market waned, especially in relation to the more expensive ground oriented, or low-rise, homes.
The cost of land, materials and labour required to build a new home increased substantially after 2003 (see chart below). These higher costs were passed on to buyers over time in the form of higher home prices. This has prompted many buyers to purchase less expensive housing types, including condominium apartments.
Last year, the number of condominium apartment starts reached the second- highest level on record, down 6% compared to the record 14,376 in 2005. Correspondingly, developers of condominium apartments enjoyed record and near- record pre-construction sales over the past two years.
When I tell people the Toronto CMA experienced record and near-record condominium apartment starts over the past two years, I often get looks of concern. That reaction is most likely attributable to events leading up to the housing market downturn a decade and a half ago.
At that time, speculators would often purchase one or more condominium apartments at the pre-construction stage of development and later sell their units, sometimes before completion, to take advantage of the double-digit price increases experienced in the late 1980s. This resulted in overbuilding and a flood of units in the marketplace, which helped set the stage for the period of price declines in the Toronto area in the early 1990s.
Fortunately for condo owners, the current situation does not appear to be analogous to the early 1990s. CMHC surveys the condominium apartment market as part of its annual rental market survey. In 2006, approximately 20.5% of registered condominium apartments were rental units held by investors - up from 18.5% in 2005. The increased rental share was attributable to a greater proportion of investor ownership in new registered stock entering the survey. So, although the rental share edged up last year, the number is still much lower than the one-third recorded in the mid-1990s.
Almost 80% of registered condominium apartments are owned by owner-occupiers. This means that while we are experiencing condominium apartment construction levels above that of the late 1980s and early 1990s, the demand for these apartments is not being driven by speculators.
Consumers have been attracted increasingly to condominium apartments because they provide a less expensive home ownership alternative, particularly for first-time buyers. Condominium apartments have also become popular with older homeowners who are interested in an alternative to the usual low-rise housing.
Prospects for purchasing a condominium apartment with the intention of renting it out look positive. For example, the average vacancy rate for rented condominium apartments, at 0.4%, is substantially lower than the average for purpose-built rental apartments in the metropolitan area. The comparatively low vacancy rate suggests that strong demand exists for this type of rental accommodation.
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