Toronto not in condo bubble
John Shmuel – Financial Post
Fears of a condo bubble in Canada’s biggest housing market are overblown, according to a new report from the Royal Bank of Canada.
RBC’s senior economist Robert Hogue said in the report Tuesday that demand in Toronto is in line with supply, contradicting claims that a condo bubble has emerged in the city.
He said that Toronto’s condo building frenzy over the last few years is mainly a response to the steep drop in new single-family homes being built. Efforts by the Ontario government to stem urban sprawl in the GTA is one of the reasons why developers are being forced to build laterally, said Mr. Hogue.
“To accommodate the 38,000 or so net new households it sees every year, the GTA must increasingly expand its housing stock ‘vertically,’” he said.
Comment: And I think that number is low – with 100-120,000 people moving here every year, it could be as many as 50,000 new households.
Mr. Hogue added that he does not expect supply to outpace demand over the next few years. He also expects that some projects currently in the construction pipeline could be delayed or cancelled.
Comment: As always. Some projects just don’t resonate with buyers and never get off the ground. Nothing new there.
“Possible reasons for such delays or cancellations include production capacity constraints on the part of builders, the inability of projects to reach sales thresholds necessary to move forward with construction, and tighter lending standards for builders,” he said.
While Mr. Hogue doesn’t see evidence of a bubble, he nevertheless expects housing prices in Toronto to cool over the next year, forecasting 2-7% decrease by mid-2013. One of the factors for the potential pullback are new mortgage rules introduced by Finance Minister Jim Flaherty last month, which, among other things, reduced maximum amortization from 30 years to 25 years.
Comment: That is certainly not going to happen. Not with prices currently rising around 7%. How is that going to turn around a full 14% in less than a year? Show me how that is going to happen. That is a huge turnaround, with absolutely no mechanism whatsoever to make it happen. Mind you, the rising number of listings is certainly interesting…
Mr. Hogue’s report also looked at the issue of investors buying condos in Toronto, something that has been a concern in the past. He concluded that worries about investors artificially inflating condo prices in Toronto are “overblown.”
Comment: Which is obvious to anyone in the business. Most investors buy from builders, from set price lists. It is the crazy Bugaboo Mafia bidding up the price of houses near Withrow Park that are pushing prices up.
Mr. Hogue said that a recent sample of projects shows that investors (e.g. buyers who purchase condos but don’t live in them) constitute anywhere from 15-40% of sold condo units. But he points out that the most recent data from the Canada Mortgage and Housing Corp., released last fall, shows that most of those investors are not flipping their condos and are most likely using them as income supplements by renting them out.
Comment: What sample? Who did it? Tridel says only 5% of their units are sold to foreign investors – and they sell a lot of condos. I think the true number is more likely 10-15%, NOT anywhere near 40%.
“Their involvement has not inflated overall housing demand beyond household formation and may contribute only to a modest overshoot in the coming years if demographics weaken,” he said.
Mr. Hogue does warn, however, that there is a risk that a flood of investors could create an imbalance in Toronto’s condo market. He said that if investors overwhelmingly buy single-bedroom units, for instance, it could skew demand and result in a bubble.
Comment: Builders build more one-bedroom units that anything else, or one-plus-dens, as they are cheap. The bigger the unit, the more expensive they are. And once they hit a certain price point, people buy houses. That is why no one buys 3 bedroom condos, no matter how much Adam Vaughn wants them to.
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.