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Is There Toronto Condo Market Bubble?
Excerpt from an article by Tony Wong – Toronto
A correction in the red-hot Toronto condominium market “cannot be far away,” says a leading housing economist.
Buying for investment purposes in the Toronto condo market has been “far in excess of market needs” and buyers face “very high risks,” said economist Will Dunning in his most strongly worded analysis yet of the Toronto market, released yesterday.
Nearly a decade into a robust housing cycle, high-rise condo sales remain extremely strong, with second quarter sales at an annual rate of 20,800, a record high, said Dunning.
While other housing economists have expressed concern over what they see as a potentially frothy Toronto condo market, Dunning, a former Canada Mortgage and Housing Corp. economist, has been among the most conservative.
Price appreciation for condos continues at a good clip – 5.9% year over year – and the average condo rent has increased 2.1%.
“An onslaught of Toronto condo completions is just beginning and I expect that rents will start to fall late in the year with the possibility of price weakness to follow,” said Dunning.
Toronto condo buyers have lucked out so far only because the construction industry is at capacity, said the economist.
Some analysts have said the market is sustainable because prices haven’t gone up as far or as fast as in the 1980s, just before the market crashed.
They also say banks are much more stringent and developers have to sell most of their units before construction. Also, high house prices mean Toronto condos are now the only choice for some buyers.
He forecasts 15,910 condo starts this year, with another 16,623 for 2007 and more than 10,000 in subsequent years, meaning buyers will have a lot more Toronto condos to choose from.
He has revised his home price forecast upward for 2006, and expects the average home to increase by 5.7% this year (compared with a previous forecast of 4.3%) to $355,305. He expects resale prices to move 3.4% higher in 2007 and then level off at about the inflation rate in 2008 and 2009.
With the deterioration of affordability due to higher house prices and rising interest rates, Dunning estimates that sales of existing homes (both condos and low rise) should be 10% lower than current levels.
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Toronto and Canada Housing Forecasts Getting Rosier
Each month, our local home builders’ association receives several market intelligence reports from the Canadian Home Builders’ Association. This month’s newsletter contained a number of items that I thought would be of interest to new-home buyers in the GTA.
Economic Update
Dr. Peter Andersen, CHBA’s consulting economist, notes that this year will be much busier than expected for construction activity of all types. Housing starts have surged and residential construction has picked-up again. Non-residential construction, always a second-half cyclical performer, is in a solid expansion. A strong office leasing market and a declining office vacancy rate are signaling the onset of an office tower construction cycle.
Housing starts averaged 248,000 at annual rates in the first quarter – an increase of 17% from the same period a year earlier. This is far above the 2005 housing starts total of 225,481 units and also the annual cyclical peak of 233,431 units set in 2004.
The March starts figures were striking – 252,300 at seasonally adjusted annual rates. The first-quarter surge reflected both single-detached and multiple-unit starts. Housing start forecasts for 2006 are being revised upwards as a result of the monthly performance through the first three months of the year.
The resale market is always a good indicator for new-home demand. It is still hot and shows no sign yet of affordability stress. First-quarter sales were at an all-time record high, after adjusting for seasonality. Sales of existing homes and condos in March continued at close to record levels. This is also good news for renovation demand as the stimulus to renovation from resale housing activity, which works with a lag, shows no sign of slowing down. The national average resale price in March in major markets was up by 11.5% year over year.
RBC affordability index
High home prices and utility costs in the last three months of 2005 pushed home affordability to its highest level in 10 years, according to the Royal Bank of Canada.
RBC’s affordability index measures the proportion of pre-tax household income it takes to service the costs of owning a home. Despite the fact that incomes continue to rise, this increase does not match the hikes in mortgage rates, house prices and utility costs.
Income growth in Canada is starting to accelerate, wages are rising, but the increase in house prices has been faster. Add to it higher interest rates and overall size of rising mortgages, so affordability is going down.
Vancouver and Calgary were hit the hardest as housing prices soared in the last quarter of 2005. Affordability is expected to get worse in the first half of this year, but should level off by year’s end.
Labour shortage
The construction industry is concerned after hundreds of construction workers from Portugal and other countries have been deported as the new Conservative government moved away from Liberal government promises of an amnesty plan.
Promises of an amnesty gave hope to underground workers who came forward to file refugee claims as a result. Their attempts to stay in the country legally ended up getting many of them deported. Canada’s current immigration system is tailored to educated immigrants, and blue-collar workers often do not qualify.
“This is insanity,” says immigration lawyer Lorne Waldman. “We have an immigration system that is supposed to supply workers for jobs, but these blue-collar workers who are needed cannot qualify to get in.”
There is a major labour shortage in the construction industry – an industry that accounts for 9.5% of Canada’s total gross domestic product and 7.5% of Ontario’s alone. It is estimated that there are between 10,000 and 15,000 illegal immigrants working in southern Ontario’s construction and hospitality industries, and 200,000 undocumented workers across the country. Deportations are therefore a major threat to the construction industry.
The Canadian Home Builders’ Association wrote a letter to Immigration Minister Monte Solberg, supporting the work foreign workers do in the homebuilding industry and urging him to resolve the labour shortage.
Solberg says the government is working with the provinces to ensure labour needs are met. “We understand the process doesn’t work well for a lot of people. We’re trying to fix that. The ideal situation is for people to go through the process.” He ruled out an amnesty, he said, because he doesn’t want to encourage people to come to Canada illegally.
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Contact the Jeffrey Team for more information – 416-388-1960
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No bubble trouble to report here
That slight slowdown in demand is due to variations in business cycles — and nothing more
By Hugh Heron – Toronto Sun
The cover of the July issue of Toronto Life features a house in Toronto that sold for $151,000 over the asking price, and the headline of the article inside is “Bubble Trouble.”
The article goes on to point out different Toronto neighbourhoods and offer “risk assessment” for them. Whenever I see things like this in the media, I just shake my head. Since I came to Canada in 1967, our industry has gone through a lot of ups and downs.
We experienced a true bubble in the late 1980s and early 1990s, when mortgage rates skyrocketed and speculators flooded the market. Despite the fact that conditions are very different today, people continue to compare our current success in home sales to that time. I don’t understand why.
The news is always filled with predictions by “experts” of all kinds. Time and again, a lot of these people are proven wrong. Years ago, we were assured that we would never see single-digit mortgage rates again — and here we are with the lowest rates we’ve had in decades.
Of course, rates will go up again; that’s how the economy works. This business is cyclical. Home builders understand that, and so do the lending institutions we deal with.
In a recent column, I pointed out that interest rates rising a bit is not the end of the world. And homeowners who ride out the lows do very well in the long run.
The one prediction that has come true, is that this year we would return to a normal real estate market — and that’s exactly what has happened.
Are there investors buying? Sure — and many opt for condominiums. Those who purchase for that reason understand the risk involved, and frankly, they help with Toronto’s rental accommodation situation.
But there is still a huge number purchasing homes and condominium suites to live in them. And that is most likely the best investment these people will make in their lives.
Prices are only going to go up, especially when you consider that we’re running out of places to build in the GTA. There are protected escarpment areas, and the waterfront is filling up.
Condominiums are key in accomplishing the intensification the provincial government calls for, and there are limits as to how much can be built nowadays.
Right or wrong, it’s reality. And remember that new homes bring in a lot of tax revenues to municipalities. One thing I’ve learned since coming to Canada is that immigrants arrive here mainly for a better life for their children, and because they dream of home ownership.
And remember, the Toronto area is still undervalued on the world stage. My crystal ball may not be perfect, but I see there always being a demand for housing in the GTA.
This is the most important municipal area in Canada, which is why nearly half of the 250,000 immigrants to Canada each year settle here.
We also have a banking system that is stable and conservative, and has saved us from the extreme problems the United States has experienced over the past few years.
The reasons why what we’re experiencing today is not a “bubble” are many and varied, and sensationalizing the negative in the media is counterproductive.
I’ve said it time and again — we create the economy. This black-and-white thinking has to stop in favour of a more balanced outlook.
Now is a terrific time to buy a new home.
There is tremendous choice out there and a lot of competition, which is always good for buyers. Even if prices rise, our homes and condos are still among the most reasonably priced real estate in the world. Instead of criticizing home buyers‘ enthusiasm in the market, we should be celebrating it.
I’m one of the “eternal optimists” referred to in the Toronto Life article. And it’s the optimists in our world who continually go forward and get things done.
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Contact the Jeffrey Team for more information - 416-388-1960
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Related posts:
- Dissecting the Condo Bubble Instead of running out and selling your condo before it's...
- Real estate deep freeze now hot thaw Sales in May and early June have outdone May and...
- Toronto Real Estate Forecast 2010 MLS® sales in the GTA will hit a record high...
- Condos to remain an attractive option for many home buyers TD Canada Trust Canada’s condo markets have delivered a strong performance...
- Toronto real estate strong in tough times The Toronto Real Estate Board (TREB) notched a record 10,955...
