Bertrand Marotte, Jacque­line Nel­son and Richard Black­well – Globe and Mail

The fevered pace of build­ing in Toronto, Van­cou­ver and Mon­treal is fuel­ing fears that the condo mar­ket is dan­ger­ously close to overheating.

A surge in con­do­minium con­struc­tion helped drive over­all con­struc­tion starts up 14% last month to a sea­son­ally adjusted annual rate of 244,900, the high­est since Sep­tem­ber, 2007, and an increase from the March pace of 214,800, accord­ing to Canada Mort­gage and Hous­ing Corp. data released Tuesday.

Starts of mul­ti­ple units, which include con­do­mini­ums and apart­ments, climbed a sharp 27.4% to 158,500, the second-highest monthly read­ing on record and a reflec­tion of what Sco­tia Cap­i­tal econ­o­mist Derek Holt termed the “ongo­ing Cana­dian condo craze.”

Com­ment: But every­one for­gets about afford­abil­ity for first time buy­ers, bet­ter urban plan­ning, a back­lash against sprawl and the fact that peo­ple want to live downtown.

Over­all starts have now increased in seven of the past eight months, play­ing into con­cerns that the condo mar­ket is headed for a seri­ous cor­rec­tion as devel­op­ers con­tinue to build. Canada now has the high­est stock of unsold con­dos since the early 1990s, Mr. Holt said. A burst bub­ble would rip­ple through the economy.

Com­ment: Why do more new con­dos mean a cor­rec­tion? And with new condo prices drop­ping 1% per sqauare foot and resale con­dos now only ris­ing at 4%, the Toronto condo mar­ket is slow­ing and begin­ning to mod­er­ate itself. There is no cor­rec­tion or crash coming.

The data put to rest “any doubts that Canada’s hous­ing mar­ket, at least in cer­tain sec­tors and cities, is at risk of over­heat­ing,” warned Bank of Mon­treal ana­lyst Robert Kavcic.

Com­ment: Again, why does an increase in condo build­ing mean over­heat­ing? How about the 70% of houses going for over ask­ing in Toronto’s Wood­bine Cor­ri­dor? That might be more worth wor­ry­ing about…

The fear, par­tic­u­larly where down­town Toronto is con­cerned, is that the explo­sion of condo starts is out­strip­ping the demo­graphic trend.

Com­ment: Says who? House prices in Canada do not exceed lev­els sup­ported by under­ly­ing fac­tors such as high immi­gra­tion, grow­ing incomes and low inter­est rates a CMHC report said. Based on these and other char­ac­ter­is­tics, clear evi­dence of a bub­ble is lack­ing, it said. So the CMHC does not think there is a bub­ble, nor are they wor­ried about house prices.

“It’s start­ing to look like [condo con­struc­tion] is run­ning a bit ahead of house­hold for­ma­tion,” said Mr. Kav­cic. “It seems the level of build­ing is def­i­nitely in over­heat­ing ter­ri­tory rel­a­tive to the under­ly­ing fundamentals.”

Com­ment: It has been ahead of house­hold for­ma­tion for a few years now. Pre­vi­ous to that, I am sure that it was less than house­hold for­ma­tion. So now it rises to even things out. Makes sense…

Build­ing per­mits in Van­cou­ver and Mon­treal have dipped, which could point to a slower pace of build­ing, but Tuesday’s num­bers still raised eyebrows.

Com­ment: Wait, Van­cou­ver went down but we are still wor­ried? That makes no sense.

Even Mon­treal devel­oper Michael Dickey wor­ries about Toronto and Van­cou­ver, though not his city, which he sees as still play­ing catch-up with the others.

“I’d be wor­ried if I was in Van­cou­ver and Toronto,” he said.

“In Toronto, you’re get­ting an over­sup­ply,” he said, adding that there is a dan­ger the banks will start back­ing off on financ­ing new deals.

Com­ment: They already are. Unless you have a track record, you don’t get a loan. And even if you are a known builder, unless you have 70–80% of your units sold with 20–25% down, you don’t get a loan. Which means that every crane rep­re­sents a project with almost 17% of the total sell­ing price (which is likely 20–25% of the con­struc­tion costs) already paid for by buy­ers. In a 300-unit build­ing with an aver­age sell­ing price of $360,000 that means the builder has over $18,000,000 from buy­ers. That is why the bank gives them the rest of the money. It takes 210–240 of 300 units to be sold before that crane goes up. Con­struc­tion is a very solid vote of con­fi­dence in the project and the Toronto condo mar­ket in general.

Joe Vac­caro, pres­i­dent of Toronto’s Build­ing Indus­try and Land Devel­op­ment Asso­ci­a­tion, said the high con­struc­tion rate sim­ply reflects the break­ing of ground on prop­er­ties that were sold in 2010 and 2011.

“The sta­tis­tics are a lag­ging indi­ca­tor to those sales of pre­vi­ous years,” he said, adding that he’s con­fi­dent Toronto can absorb new condos.

Com­ment: Cranes today mean sales yes­ter­day. Sales today mean cranes tomorrow.

“House­hold for­ma­tions are dif­fer­ent today,” he said. “You’ve got baby boomers down­siz­ing, born-again sin­gles, young cou­ples who want an afford­able first home, and 100,000 new peo­ple com­ing into the [Greater Toronto Area] every year.”

Com­ment: Exactly! And those are the ones buy­ing con­dos. Or rent­ing the ones investors buy.

Nancy Taza, a sales rep­re­sen­ta­tive at a bro­ker­age office in one of the City­Place condo com­plexes in down­town Toronto, who has a direct stake in the mar­ket, also isn’t worried.

“Are there a lot of build­ings going up? Yes. But, I really don’t worry about the mar­ket and my invest­ments [three con­dos], because I see the demand every day and it’s so strong – espe­cially in City­Place where things are still devel­op­ing and the area is growing.”

Com­ment: City­Place opened in 1998 or so, I remem­ber dri­ving by when they built the sales cen­tre. They will have 20-odd tow­ers when they are done, maybe 6,000+ con­dos in total. And they will sell every sin­gle one. Never mind the first ones have now resold a num­ber of times. In 2018 I bet we can look back and add up 20,000+ indi­vid­ual condo sales – all in that one com­plex. That is the Toronto condo mar­ket in microcosm.

CMHC offi­cials said on a con­fer­ence call that they are mon­i­tor­ing the condo mar­kets but also don’t see a prob­lem at the moment.

Com­ment: As I quoted them above, “clear evi­dence of a bub­ble is lacking”.

Royal Bank of Canada chief exec­u­tive offi­cer Gor­don Nixon said there are con­cerns about the condo mar­ket in Van­cou­ver, but that they aren’t indica­tive of the hous­ing sit­u­a­tion across Canada.

Com­ment: Exactly. Local mar­kets are local mar­kets. What hap­pens in Van­cou­ver has no effect at all on Toronto, some 4,200km away. Canada is quite a big place!

He told a finan­cial con­fer­ence in Toronto hosted by Bloomberg that he’d “like to see the rhetoric [about a hous­ing bub­ble] come down a lit­tle bit.”

Com­ment: You and me both…

Jim Ritchie, senior vice-president of sales and mar­ket­ing at toronto condo devel­oper Tridel, said few condo buy­ers in Toronto are from offshore.

Of 2,100 units Tridel has deliv­ered in the past year, about 95% were sold to local buy­ers, he said.

Com­ment: There you go. Straight from some­one who knows, who does this every day. And needs to know where buy­ers are from, for tax rea­sons and down pay­ment require­ments. They col­lect copies of ID for all buy­ers, all builders do. So they are the only peo­ple who know for sure where their buy­ers are from. And this BS recently about for­eign­ers screw­ing up our real estate mar­ket, or push­ing up prices, it just shows it all to be bunk. Up to 65% of buy­ers are for­eign investors? What a crock!

Many of those are investors, he told the same sum­mit, and about 20% of units are put up for resale as soon as they are complete.

Com­ment: And of that 20%, some are investors. Oth­ers lost their job, got mar­ried or had a baby. Some were trans­ferred, oth­ers walked in on their PDI day and real­ized how small it was. Or hated the view. Remem­ber, these peo­ple all bought 3–5 years ear­lier – life can change a LOT in that time.

Mr. Ritchie said that across Toronto, there were 173 projects under con­struc­tion over all at the end of the first quar­ter, rep­re­sent­ing 48,000 units. Because builders are so risk averse, they will not start a project until it is at least 70% sold, he said.

Com­ment: Hmm, I thought it was 143 projects, but I defer. Even so, all this talk about how many we have going on, there were 129 projects under con­struc­tion at the end of 2006. And that is still more than NYC or Chicago. And the Toronto condo mar­ket has not col­lapsed between then and now – even with the BS of 2008 thrown into the mid­dle of it all.

Most Tridel con­dos are in the $250,000-to-$500,000 range, he said, and the aver­age age of a buyer is 33. One rea­son there are so many con­dos in the city is that the demo­graph­ics of Toronto is ideal, with many sin­gles or cou­ples with­out children.

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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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