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.

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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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toronto over­build­ing condos

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