Greg Quinn – Bloomberg News

Toronto’s siz­zling condo mar­ket has peaked, and devel­op­ers are just wait­ing to see where the roller coaster goes next, says a hous­ing research firm.

“We have hit the peak in the new condo mar­ket, we are on the down side of the roller coaster,” Ben Myers, exec­u­tive vice pres­i­dent of Urba­na­tion Inc., said in a phone inter­view. “We will really have to see how the devel­op­ers react to a lit­tle bit of the slow­ing in the mar­ket, if they hold off on new launches.”

Com­ment: Well yes, 25–30,000 new con­dos every year was cer­tainly not sus­tain­able. But it does not mean we are drop­ping to zero now. Pass­ing the peak does not mean a plum­met to the basement.

Canada’s biggest city is being trans­formed by a wave of new con­dos as low inter­est rates and a sta­ble econ­omy draw investors and indi­vid­ual buy­ers to down­town projects. Finance Min­is­ter Fla­herty tight­ened mort­gage lend­ing rules in June and crit­i­cized “con­tin­u­ous build­ing, with­out restric­tion” of con­dos while the cen­tral bank says record con­sumer debt and the chance of a sud­den hous­ing cor­rec­tion are major risks to the economy.

On Tues­day data showed that the value of build­ing per­mits fell less than expected as a gain in hous­ing off­set a steep decline in non-residential con­struc­tion plans.

Per­mits dropped 2.5% in June, com­pared with a 3.6% fall expected by ana­lysts, sea­son­ally adjusted data by Sta­tis­tics Canada showed on Tuesday.

Com­ment: Yet again ana­lysts were wrong.

Hous­ing per­mits rose for the sec­ond straight month after four con­sec­u­tive declines, advanc­ing 4.2% fol­low­ing a revised 9.6% jump in May.

Per­mits for single-family units and for multiple-family units both rose in value by 4.2%. The cen­tral province of Ontario led the gains in both categories.

Com­ment: So wait, per­mits are up and val­ues are up in Ontario, but peo­ple are say­ing we are on the way down? Wuh?

Non-residential per­mits fell 12.3% fol­low­ing a 3.6% increase in May, mainly because of weaker con­struc­tion plans for gov­ern­ment build­ings in the West­ern province of British Colum­bia and for med­ical facil­i­ties in Alberta.

Although Cana­dian home prices hit a third straight record high in June, extend­ing a steady climb that had trig­gered fears of a prop­erty bub­ble, a slow­down in the pace of price increases sug­gested the red-hot hous­ing mar­ket is cooling.

Com­ment: National prices have been increas­ing at 3–5% annu­ally – when infla­tion is 2–3%. How is that any­thing close to a bub­ble? High prices do not a bub­ble make. Extremely rapid rises (such as the 127% increase in 15 months in 1989–1990) are the true mark of a bubble.

Record Projects

New down­town projects in Toronto include Cin­ema Tower by Daniels Corp. and Pem­ber­ton Group’s U Con­do­mini­ums. There are a record 196 condo projects with 52,695 units under con­struc­tion in Toronto, accord­ing to Urba­na­tion, allow­ing investors who dom­i­nate the mar­ket for new units to become “a lit­tle pick­ier on the projects they are hold­ing out for” Myers said.

Com­ment: I am so con­fused. I have heard num­bers from 143 to 196 as to how many con­dos are being built. Is it GTA or just 416? Active con­struc­tion or just active projects for sale and being built?

Howard Youhanan of Con­do­man Realty Inc., said some investors “will never see a return” because “the builders over­priced the units in the first place.”

Com­ment: Amen to that. That is the biggest prob­lem. Not the neb­u­lous threat of a cor­rec­tion that is unlikely to hap­pen, but pay­ing too much to the builder at the beginning.

Condo sales dropped 10% in July from a year ear­lier to 1,753 units and the aver­age price fell 1% to $328,216, the city’s real estate board said Aug. 3. Prices have fallen 11% since Feb­ru­ary, accord­ing to Bloomberg cal­cu­la­tions using Toronto Real Estate Board fig­ures, and were lit­tle changed in July from a year ear­lier, end­ing annual price gains that peaked at 22% in October.

Com­ment: But that is cherry-picking num­bers. Prices tend to rise in the begin­ning of the year and then fall. Year-over-year is the only way to know for sure. And August 2011 had con­dos aver­ag­ing $355,513 mid-month, and at the mid­dle of August this year we are at $341,270 – a decline of 4%. So yes, there is a drop from last year, but it is less than the sen­sa­tional 11% being thrown about.

Hous­ing research com­pany Urba­na­tion also reported Aug. 2 that new condo sales plunged 50% in the sec­ond quar­ter to 4,769, from a record high a year ear­lier while there were a record 18,123 unsold new units.

Com­ment: What about avail­able units? If there were 50% less units for sale, then it makes sense. But if the inven­tory remained the same and vol­ume dropped, that says some­thing. But this can­not be eval­u­ated with­out context.

The increase in unsold con­dos has been mod­er­ated by a decline in the stock­pile of low-rise units, sug­gest­ing there isn’t a prob­lem with over­sup­ply accord­ing to George Car­ras, pres­i­dent of Real­Net Canada Inc., a real estate data seller. He said the 25,930 unsold homes in the first half of the year are close to the aver­age since 2000, accord­ing to his company’s figures.

Mort­gage Restrictions

Mort­gage restric­tions and provin­cial rules lim­it­ing Toronto land use may drive up prices by lim­it­ing the sup­ply of new con­dos, he said. About half of condo projects that have pre-sold 70% of the units haven’t begun con­struc­tion, he said.

“The tight­en­ing of credit is caus­ing a restraint around the abil­ity of traditionally-sold projects to move into con­struc­tion,” Car­ras said. “Tight­en­ing of credit could have the exact oppo­site out­comes to what they might be expecting.”

Com­ment: Yes… if sup­ply slows and demand remains con­stant (though more likely increas­ing) then upward pres­sure on prices is the result. Less con­dos will make them more expen­sive – wit­ness sin­gle fam­ily homes.

The tougher lend­ing rules are the lat­est in a series of mea­sures that have raised monthly pay­ments for a typ­i­cal first– time home­buyer by 25%, said Derek Holt, Scotiabank’s vice-president of eco­nom­ics in Toronto.

“The reg­u­la­tory part of the pic­ture will be an addi­tional down­side for hous­ing mar­kets to deal with for a long time yet,” Holt said. “This is the mar­ket going through a cor­rec­tion that I think is needed to hope­fully avoid what would have been an even worse outcome.”

House­hold Debt

The tighter mort­gage rules came after Bank of Canada Gov­er­nor Mark Car­ney said that record house­hold debts posed the biggest domes­tic risk to the finan­cial sys­tem. The ratio of house­hold debt to dis­pos­able income reached about 154% in the first quar­ter, higher than the U.S. fig­ure of 141%.

Com­ment: What does it mat­ter how we com­pare to the US? They were preyed upon by evil bankers, plus their econ­omy is gen­er­ally worse than ours. I do not like our debt ratio being that high, trust me, but com­par­ing it to the US is useless.

Car­ney has kept his key lend­ing rate at 1% since Sep­tem­ber 2010, the longest pause since the 1950s, and in July cut his eco­nomic growth fore­cast cit­ing global weak­ness and the weak­est export recov­ery since World War II. The cen­tral bank’s July 18 fore­cast also said that hous­ing invest­ment will make no con­tri­bu­tion to eco­nomic growth in 2013 or 2014 after signs of “overbuilding”

“You don’t even need a col­lapse sce­nario in hous­ing mar­kets to keep the Bank of Canada on hold for some time yet,” said Holt, who last week pushed back his fore­cast for a rate increase until 2014 due to weak eco­nomic growth includ­ing hous­ing demand.

Com­ment: Same as what I said last week, don’t expect to see a rate hike until late 2013 or likely 2014.

Indus­try Sentiment

The Real Prop­erty Asso­ci­a­tion of Canada said Aug. 2 that an index of indus­try sen­ti­ment fell to the low­est level in three years in the third quar­ter because of con­cern about a slow­ing econ­omy. The mea­sure, com­piled by FPL Advi­sory Group fell to 58 from 63 in the sec­ond quar­ter, with read­ings greater than 50 still sug­gest­ing “pos­i­tive trends.” The indus­try group says its mem­bers own more than $180 bil­lion in real estate assets.

Com­ment: How many of them are in Toronto and how many of that group dropped their rating?

Toronto isn’t in the mid­dle of a con­do­minium bub­ble because record con­struc­tion of new units is being matched by the demands of the city’s growth, Royal Bank of Canada econ­o­mist Robert Hogue wrote in a report last month. He said that condo prices may fall by as much as 7% on a quar­terly basis from their peak because of tighter reg­u­la­tions, increased sup­ply of new units and decrease afford­abil­ity. Fla­herty in June low­ered the longest mort­gage amor­ti­za­tion to 25 years from 30 years and capped debt pay­ments at 39% of income.

Com­ment: But this drop is against years of gains, to be hon­est. And small drops are not such a bad thing. Unless you are sell­ing… but those buy­ing to flip do every­one a dis­ser­vice. Mind you, fewer new projects and we are going to see prices creep back up as sup­ply shrinks.

Stan­dard & Poor’s cut its out­look to neg­a­tive from sta­ble on seven Cana­dian banks July 27, includ­ing Toronto-based Royal Bank of Canada and Toronto-Dominion Bank, cit­ing a pro­longed increase in hous­ing prices and con­sumer indebtedness.

Com­ment: Every­one for­gets that our mort­gage default rate is only 0.4%. So while banks have tons of mort­gages out, the default rate is beyond low. And we have CMHC to back them up. How that can be neg­a­tive, I do not know.

‘Pol­icy Initiatives’

S&P, which said it might lower the rat­ings on Royal Bank of Canada and Toronto-Dominion one level, said it “will con­tinue to con­sider the impact of recent gov­ern­ment and reg­u­la­tory pol­icy ini­tia­tives to cur­tail poten­tial sys­temic risk aris­ing from the hous­ing sec­tor as well as assess Canada’s rel­a­tive per­for­mance vis-à-vis its global peers.” Royal Bank of Canada and Toronto-Dominion are rated AA– by S&P, the fourth-highest level.

Flaherty’s tight­en­ing may help the mar­ket because it “cod­i­fied what an afford­able sit­u­a­tion was,” said Jason Mer­cer, senior man­ager of mar­ket analy­sis for the Toronto Real Estate Board. Toronto homes in gen­eral still are well below the pay­ment lim­its, sug­gest­ing there is more scope for price and sales gains, he said.

The aver­age five-year mort­gage rate was 5.24% last week, down from a peak of 7.54% in Decem­ber 2007 and close to the low­est since the 1950s.

Com­ment: Posted bank rates, which we all know are bunk. Peo­ple are actu­ally get­ting 2.94% on their 5-year mortgages.

New Units

There are still signs that buy­ers and sell­ers are keen for new units. The Ontario Place provin­cial park should be sold to hous­ing that may include con­dos, accord­ing to a report writ­ten for the gov­ern­ment by for­mer Pro­gres­sive Con­ser­v­a­tive leader John Tory, while Daniel Valen­cia Mizrachi says he has five clients who want to rent a condo and he can’t sub­mit their offers fast enough to secure them a place to live.

Com­ment: Do not even get me started on the rental mar­ket. I had a client put his (admit­tedly awe­some) loft up for rent. He posted it on Kijiji on Sat­ur­day and by Sun­day had 30 phone calls and 70 emails – he did one view­ing and 45 peo­ple showed up. Ask­ing $1,700 he got $1,825 for it – and turned down $2,000. So yeah, demand for con­dos down­town is still pretty high.

“All the rental con­dos are rented in a few days, and nor­mally above the ask­ing prices. Now they are ask­ing for one bed­room plus den– $1,900, which doesn’t make sense, and peo­ple are ready to pay that,” he said. “The mar­ket will be safe for another two or three years, no problem.”

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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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howard youhanan

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