Condo bump in Toronto could signal overbuilding
By Jay Bryan, The Gazette
A big jump in home construction last month has reheated concerns by some analysts over the prospect of an overheated housing market. But the problem is highly localized, specifically among Toronto condominiums.
That’s because the March data on housing starts showed a sharp divide between Toronto condos and the rest of the market. While the number of starts jumped by an unexpected five% across Canada in a market that was expected to be roughly unchanged, “this was pretty well entirely Toronto condos,” said economist Robert Kavcic at BMO Capital Markets.
Construction of Ontario multiple-unit buildings – mainly condos in Toronto – shot up by more than 50% between February and March, while the rest of the nationwide market remained little changed from its average pace over the past 12 months.
“Canada’s condo craze kicked into even higher gear during March, and this is bound to feed concerns about overbuilding,” said Scotia Capital economists Derek Holt and Dov Zigler in a note to clients.
Holt and Zigler expressed concern that the number of unsold new condominium units has been rising sharply.
Other analysts noted that the condo boom isn’t evident in other big markets, so there’s little reason to see a widespread problem in the housing market. Montreal condo starts. for example, have trended down in recent months
In Toronto, however, there are lots of anecdotal reports of international investment money flowing into Toronto’s condo market as a refuge from the low investment returns and economic uncertainties recently dogging many other countries, noted economist David Onyett-Jeffries at the Royal Bank.
On top of this, the huge jump in March construction is likely the result of exceptionally good weather and the fact that condo construction activity can move sharply up in any month, that sees a single big new project.
Comment: It dropped in February then jumped up again to make up for it.
The recent level of condo starts in Toronto is creating strains in the market, believes Craig Alexander, chief economist at the TD Bank. Although he doesn’t see it as the kind of speculative mania that would foreshadow a serious meltdown, there does seem to be a surge of supply that will be hard to absorb.
Comment: The same supply people have been worrying about since 2003. It always finds a way to get absorbed, not to worry. The key is that there is no speculation problem.
Alexander agrees with Onyett-Jeffries that international investors look like a large factor, but he thinks they’re mostly looking for long-term rental income in a world where gains on financial markets have been uncertain at best, not the overnight capital gains one seeks by flipping units in a speculative market.
Comment: Yes, the rental market is now the condo market. There are no new rental buildings being built, so investors are supply the rental inventory with condos. And it seems to be working well.
Still, Alexander believes, the vigour of Toronto condo construction has turned this market, along with the painfully high-priced Vancouver housing market, into the high-risk neighbourhoods of Canadian real estate.
Comment: Vancouver, maybe, as we watch prices drop. But Toronto is still a LONG way from that.
The problem with having an skyrocketing, investor-driven condo market, he notes, is that all the units now being built could flood the market, leaving some investors unable to find tenants and inclined to sell. If many sell at once, it could easily trigger a decline in all condo prices.
Comment: Yes, they “could” be a problem. But that is only “if” they all decide to sell at once. And since they are buying them to hold them and rent them for the long term, there is no pressure to sell. And if some start to sell, the smart ones will hold theirs and not flood market, not pushing prices down. Keep them and the panic subsides and the prices stay level or rising. And I have a feeling that most of the people with buckets of money to spend here have a brain – how else did they make the money in the first place?
That probably won’t be catastrophic, since Toronto’s demand for housing is strong enough to sop up the excess units over the coming decade, but it could lead to bigger-than-average price declines over the next few years. Alexander estimates that the national home market is already overpriced by an average of 10 to 15%.
Comment: What is an “average” price decline? Seeing as we have not seen prices go down since 1995, we have no idea what that would be. And even if there is a period of decline, it will not last and prices will rise again. Even in the chaos of 1989, prices rose 127% in 15 months, then crashed. They fell from 1990 to 1996. But then back up again, way up. So if prices drop, again the smart investors will hold their units and wait for prices to rise again before selling. If enough people do that, prices stop dropping as supply dries up. And we are right back where we are right now. And heck, think about it. If prices were to start dropping now, people would go insane to buy. There are a lot of people who have bought into the false belief that prices will fall. They are all out there, waiting… and as soon as prices start to fall, they are going to pounce. And push prices right back up again. Never mind that there are still a lot of buyers out there – about 10x as many in the low-rise sector. And with 100–150,000 people entering the GTA housing market every year, there is a lot of buying pressure across the spectrum.
His forecast, though, is that most of Canada will be able to back off from today’s high home prices with minimal damage. Across the country, he thinks prices will be roughly flat this year, then drop perhaps eight to 10%, perhaps a bit less, over the following two years as rising mortgage interest rates squeeze demand.
Comment: Yeah… no. That is not going to happen. Interest rates were 5–6% until the past year or so – and still we set sales and price records. Vancouver is dropping, but there are bidding wars in Halifax, Toronto… even in Winnipeg. That is certainly not the start of a price-dropping trend. And if interest rates rise, that means the economy is doing well. Which means more people have jobs and more people have more money. Which means they can afford to buy houses.
Under this scenario, the fall-off in demand would be gradual enough that price declines would have to offset only about two-thirds or less of today’s overvaluation. Rising average incomes would fill the rest of the gap.
Comment: So what is this overvaluation? How much is it? Why are they overvalued? Oh right, no one ever has an answer. They just say it and expect you to believe it. I don’t… And why would prices drop if incomes are rising? That means they have more money – and can afford higher prices.
The big exceptions are likely to be in the Toronto condo market and the Vancouver market for both condos and single-family homes. Vancouver has actually cooled recently, but remains the highest-priced market in the country.
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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