Toronto Bubble Risk Tops New York in Condos
Doug Alexander – Bloomberg
A sliver of land wedged between Toronto’s elevated expressway and an off-ramp that pumps traffic into downtown may become the epicenter for a Canadian housing bubble.
In four years, this site that’s now used as a parking lot and police impound near the shores of Lake Ontario will be home to Ten York, a 75-story glass building that would be the country’s third-tallest condo tower.
Toronto has more skyscrapers and high-rises under construction than any North American city — almost three times as many as New York — stoking debate on whether the condominium market in Canada’s largest city is headed for a U.S.-style correction as prices rise and household borrowing hits a record. Canadian lenders including Toronto-Dominion Bank last week raised mortgage rates to cool off the housing market.
“Condo construction has always been rather prone to boom and bust cycles, and this one seems particularly strong,” said Sheryl King, an economist with Bank of America Merrill Lynch in Toronto. “Builders seem to overestimate how much demand is going to be out there, and that’s when you tend to see some abrupt pull-back.”
Canada’s housing market is about 10% overvalued, with inflated prices primarily in Vancouver, Montreal and Toronto, King said in a telephone interview. “We would call it a bubble,” she said.
Comment: And they would be wrong. Read below for proof.
Mortgage Lending Expands
Rising home prices have led to a 53% increase in residential mortgage credit in the past five years, or an average rate of 8.9% a year. The volume of outstanding mortgages rose to $1.08 trillion as of August, according to the Canadian Association of Accredited Mortgage Professionals. Defaults remain low, at 0.42%, according to data from Canada Mortgage & Housing Corp., a government-run housing agency.
Comment: But that makes perfect sense. Sales volume is increasing every year, as is the average price. It would only make sense that the total volume of mortgage lending would rise as well.
The country’s financial authorities have become increasingly vocal about the housing market. The heads of Bank of Montreal and Royal Bank of Canada (RY); the country’s banking regulator, and Bank of Canada Governor Mark Carney have all expressed concerns about the condo markets in recent months as cranes and construction crews swamp Toronto.
Toronto has 148 high-rises and skyscrapers being built, compared with 59 tall buildings for No. 2-ranked New York City, and 22 in Chicago, according to Emporis, a Hamburg-based building data company.
Most of the work is for housing, with 105 residential high- rises proposed or under construction, according to a database by SkyscraperPage.com. Fourteen are slated to finish this year, including two hotel-condos. Trump International Hotel & Tower Toronto, Canada’s tallest residential building, opened Jan. 31, adding 118 luxury residences to the city’s inventory.
“The number of units under construction is quite high, start levels have trended up, and the number of units coming to completion is growing,” said Shaun Hildebrand, a senior market analyst for the Greater Toronto Area with Canada Mortgage & Housing Corp. “Supply at all ends of the development process is growing quite quickly.”
A record 27,504 condo units in the City of Toronto were under construction at the end of last year, according to Canadian Mortgage & Housing annual data, adding to the city’s total of 199,000 units.
“If builders stopped building today, there’s five years worth of supply that is about to be delivered, relative to what normal population growth is,” Bank of America’s King said.
Rates to Rise
Investors are piling into Toronto’s condo market because of cheap borrowing costs and that may become risky when interest rates rise, said John Andrew, a real estate professor at Queen’s University in Kingston, Ontario.
Comment: No, they are not buying because rates are low. They have been buying Toronto condos for more than a decade now, with mortgage rates ranging from over 8% down to 2.25% for variables rates previously. They are buying here because it is a good investment.
“They’re being bought because the interest rate is very low,” Andrew said in a telephone interview. “They’re financed to the hilt, so they’re very sensitive to the refinance risk when the loans come up.”
Comment: Not true. Foreign investors must put down 35% to purchase new condos, so they actually have a lot of equity in their condos. They are certainly NOT financed to the hilt.
Banks are also cutting their funding costs by selling covered bonds, a form of corporate bond backed by assets such as home loans. Bank of Montreal and Bank of Nova Scotia sold $4.5 billion of the securities last month, after a record $25 billion of sales in 2011. Relative yields on the covered bonds fell to 130 basis points on Feb. 9, down from 170 at the start of the year, according to Bank of America Merrill Lynch data.
The Bank of Canada has held its benchmark lending rate at 1% since September 2010 and will probably maintain that level until the second quarter of 2013, according to median forecasts from economists compiled by Bloomberg. Carney has said “excesses may exist in certain areas” of Canada’s housing market.
“The elevated levels of ‘multiples’ inventories, the ample pipeline of developments underway, and heavy investor demand (much of it foreign) reinforces the possibility of an overshoot in the condo market in some major cities,” Carney said in a June 15 speech in Vancouver.
Investors are underestimating the potential impact of the surge in condo supply coming onto the market in the next 12 to 24 months, according to King. That could drive down resale prices and rents, even with low interest rates and a stable mortgage funding market.
Comment: We have been hearing this here in Toronto for more than 10 years now. Trust me, it is not going to collapse. The condo market is the new rental market. With 100,000 newcomers to Toronto every year, never mind university grads and other first time owners/renters – there is a steady supply. Rents have been stagnant for years now, it has not slowed anything down.
“Investors are a concern given rental rates no longer fully cover costs and unit price increases going forward will not likely provide sufficient return,” the Office of the Superintendent of Financial Institutions said in a June draft report obtained last month by Bloomberg News through an Access to Information request.
Comment: Again, with 35% down, the monthly carrying costs are low, making it easy to have rents pay the bills.
Foreign buyers are also affecting housing, according to OSFI. The bank regulator has been monitoring the impact of foreign investment on the housing markets in Toronto and Vancouver, the documents obtained by Bloomberg show. Authorities in China, Hong Kong and Australia have recently taken measures to cool off their residential real-estate markets, the documents note.
“The stability of Canada has moved it to the forefront of investor preference, in some cases ahead of the U.S.,” states a draft analysis of Toronto’s condo market.
Investors represent a “significant portion” of Toronto’s condo market, with 20% to 30% or higher for some projects, the report said.
Comment: A number that no one knows, it is all just a guess. And I have heard guesses ranging from 20% to 65% – which is a HUGE variance. And it does not even matter, really. Why do we care if owners live in their units or rent them out?
High-rise homes reached a record 62% of all new home sales last year as condos outsold traditional detached homes three to one, RealNet said in a Jan. 20 report with the Building Industry and Land Development Association. That’s up from 25% of the market in 2000.
Demand Won’t Fall
“In absence of another recession, we’re not expecting demand to fall,” Canadian Mortgage’s Hildebrand said. “We’re expecting it to hold steady so long as the economy holds steady.”
Toronto is home to about 2.5 million people — more than double that including its suburbs — and accounts for about 11% of Canada’s economic output, according to the City of Toronto. The city is home to Canada’s five-biggest banks, two of the three largest Canadian insurers as well as some of the country’s largest pension funds, asset managers and financial- services firms.
Realtors and others in the industry say the record condo units under construction will be easily absorbed by 100,000 immigrants streaming into the city each year, wealthy foreign investors looking for a haven to park their money and young urbanites demanding to work near the financial industry that is the backbone of the city’s economy.
Comment: My god, that is the best one-paragraph summary of the health of our condo market I have ever read!
“There are reasons why people want to spend time in Toronto, and that’s part of what supports these real-estate markets,” said William Strange, RioCan Real Estate Investment Trust Professor of Real Estate and Urban Economics at Rotman School of Management in Toronto. “Toronto tends to be a pretty good place to do business and, with respect to Canada, it also tends to be a place where people want to live.”
Tridel, Toronto’s biggest condo developer, is already fielding calls for the 783 units of Ten York and plans to start selling in April, more than a year before the C$295 million project begins construction.
“There’s a tremendous amount of interest,” said Jim Ritchie, senior vice president of sales and marketing for Tridel. “We have thousands of names of people who want to buy here.”
Developers sell most units of a project before building begins, and many investors buy the condos to either resell or rent out when the construction is finished. Rental units accounted for 24% of all condos in Toronto last year, up from 21% in 2010, according to CMHC.
Comment: Another guess.
A total 8,250 condo apartment rental units were added to Toronto last year, CMHC said. The average vacancy rate for Toronto rental condos was 1.3% last year, down from 2% in 2010.
Comment: And that is an astoundingly low vacancy rate – which is why investors buy condos to rent them out. The Canadian average vacancy rate is around 2.2%, almost 70% higher than Toronto’s rate.
Toronto’s rising prices for townhouses and single-family homes are driving more homebuyers into condos. In January, the average price for a detached home in Toronto was $743,993, up 15% from the same month in 2011, according to Toronto Real Estate Board. The average price for a condo was only $343,835, up 5%.
U.S. housing prices plunged by a third between the peak of July 2006 and November 2011, according to S&P/Case-Shiller Composite-20 Home Price Index (SPCS20). By comparison, Canadian housing prices rose 32% in the same period, according to the Teranet-National Bank National Composite House Price Index.
Comment: Our economy did better and stayed strong as well. Our banks are solid, the system is secure and safe. That is why there is a lot of foreign money here, it is a great place to invest.
Toronto isn’t facing a bubble because price increases have been steady, said Ben Myers, executive vice president of Urbanation, a Toronto-based real-estate research firm.
“We’ve seen the same level of increase in the market year-over-year in terms of index pricing in 10 of the last 15 years,” Myers said. “If we didn’t have an explosion of the bubble in those years, I’m not sure what would cause it to happen now.”
Comment: But a slow increase, year after year, is the very opposite of bubble. And that is why we do not have one. When prices rise 5-9% every year for 15 years, that is just a slow and steady rise, NOT a bubble.
The housing gains have sparked worries that CMHC, Canada’s federal mortgage agency that insures some mortgages, is becoming overexposed to a potential slump, leaving taxpayers at risk.
Comment: If, and only IF, there is a major market correction. With no catalyst for such a collapse, the worries are unfounded. We would need unemployment to skyrocket (even though it is down from the 8.x% range to 7.6% over the past year or two), plus interest rates to jump (though we are at record lows with the prime rate not set to change for over a year) combined with real estate prices to go through the floor (which would be hard with prices rising nationally around 3% per year and around 9% annually in Toronto). Just ain’t gonna happen folks.
Canadian Mortgage & Housing said Jan. 31 that it’s rationing mortgage insurance for lenders as the housing agency approaches the C$600 billion legal limit for backstopping the loans. Lenders have increased their demand for insurance of their mortgages amid “liquidity needs” since the 2007 financial crisis, CMHC said.
Lenders are becoming “increasingly liberal” with mortgages that don’t require borrowers to verify income, OSFI said in the documents obtained by Bloomberg News.
Comment: That is NOT TRUE at all. It is the opposite. Banks are tightening up and are getting in trouble because some self-employed and new immigrants are having trouble getting mortgages. We are making the system tighter, not looser by any stretch. And any mortgage changes would be the 4th change to make the rules stricter. Trust me, our banking system only gets more restrictive.
Finance Minister Jim Flaherty said that he’s concerned about loosening of standards by some Canadian financial institutions on those types of mortgages, and steps are being taken to “correct” the practice.
Toronto-Dominion Bank (TD) Chief Executive Officer Edmund Clark said in a Feb. 8 interview at Bloomberg’s New York headquarters that banks are tightening lending on loans for condominiums. Toronto-Dominion, Royal Bank of Canada and Canadian Imperial Bank of Commerce scrapped their promotional 2.99 percent mortgage rates last week, less than a month after they were introduced.
Comment: Which had nothing to do with condos. It was basically a “sale” the banks had. Now it is over.
“Banks are leaning against it in the condo market right now and leaning against it in the unsecured lending market and just a general leaning against borrowing,” Clark said. He said the changes may lead to a “successful soft landing” for the housing market.
The government has already taken measures to restrain the housing market, including reducing amortizations and requiring stricter criteria for mortgage qualifications. Housing price gains have slowed in the past three months.
Comment: But even with those 3 changes, prices and sales volume keep rising…
Still, housing markets in Vancouver and Toronto have become “severely unaffordable,” according to a January report by Demographia, a public policy firm.
Comment: Vancouver is way out of whack, but Toronto still has houses for less than $300k. The mortgage on that is less than $1,250 a month with 5% down. That is VERY affordable. People just want to live in the chic or cool areas – and they cost more. But there are tons of perfectly acceptable neighbourhoods that your average person can afford.
Vancouver’s median home price of $678,000 in the third quarter was 10.6 times its median pretax household income of $63,800, making the city the least-affordable housing market after Hong Kong among large English-speaking cities, Demographia said. Toronto’s home price of $406,400 was 5.5 times household income of $73,600, a 40% deterioration in affordability since 2004.
Fallout from Toronto’s construction boom may not surface immediately, according to Queen’s University’s Andrew.
“It’s going to be three-and-a-half to four years from now when these loans are all coming up and you’ve got a number of people who say they can’t afford to refinance it, so they’ll just sell,” Andrew said. “They’ll find out that 40 units in the building all went on the market in the same month, and now they’ve got a big problem.”
Comment: Horse pucky. Every newly completed condo has a ton of units on the market. They all sell, or they find tenants and keep them. The condo boom has been going since about 1998, this is not new, we have seen this all before, year after year.
Contact Laurin Jeffrey for more information – 416-388-1960
Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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