Toronto Condo Market - Boom Or Bust?
By Theresa Boyle - Toronto Star
The price of condos in the Greater Toronto Area is nudging upward after two years of remaining flat.
And while buyers are still scooping up units, analysts are forecasting that sales will be slightly down from last year's record high.
"We started seeing projects coming out at higher prices in the first quarter. I think in the second quarter we're going to continue to see that," Jeanhy Shim, president of Urbanation, told a breakfast meeting of developers last week.
Developers last year were forced to begin passing on the rising cost of construction to buyers, after two years of absorbing the extra costs themselves, Shim explained to an audience of 200. "Everybody has been trying to keep the prices affordable, yet still contain the rising construction costs."
Urbanation is a market research firm that tracks the condo industry. Shim made her remarks at a meeting sponsored by Marketvision, a condominium marketing firm.
The average price per square foot for a condo sold in the GTA in the first quarter of this year was $324, according to Urbanation. That compares to $301 a year ago. Since the first quarter of 2003, the price per square foot has stayed unchanged.
"You can see the price curve was very flat for almost two years. There was no price change," Shim said.
Despite the 8-per-cent increase in prices over the past year, she said buyers are still snapping up new units in droves.
The "opening sales absorption rate," which represents the percentage of units sold during the opening quarter of a new project, stood at 31 per cent during the first three months of 2006. The "normal" rate of sales absorption is between 25 and 35 per cent.
"The opening sales absorption rate for new projects was still strong. It was still within the historically normal level," Shim said.
"That's a really important distinction to make because the fear is that, if prices go up, consumers may stop buying. But, so far, we're not seeing that and consumers are still responding."
Almost 3,800 new highrise condo units were sold in the first three months of this year — 34 per cent more than the same time last year.
"I know many of you were telling me that you had record first quarters in terms of sales internally," Shim told the crowd. "It was quite a strong start to 2006."
The warmer weather was a big contributor to the strong sales activity at the start of the year, according to the Greater Toronto Home Builders' Association.
Despite the promising start, Shim expects the year-end numbers will be down from last year's record high.
About 16,000 highrise condo units were sold in the GTA last year, representing 39 per cent of all new homes sold.
Shim's early forecast is for 12,000 highrise units to be sold in 2006.
"It will be down a bit because of rising costs. We're not sure what kind of an impact that will have," she said.
"Right now it looks as though consumers are still buying. You guys (developers) are still delivering excellent value for money, but, depending on how high construction costs go, it will be interesting to see at what point the consumers will say, `The value for money just isn't there. It's too much.'"
Niall Finnegan, a senior director with Altus Helyar, a company that does cost consulting on construction projects, told the breakfast meeting that construction costs in the highrise sector increased to the tune of 8 per cent last year and are expected to do the same this year.
"It's not a number we want to say, but that is where we think it's going to be," he said.
"It's as a result of two primary reasons. One is productivity inefficiencies and the second is higher margins for the trades," he explained.
There's a shortage of skilled labour and the multitude of construction projects happening across the country is driving up the price of trades.
"The fundamentals remain strong in the Toronto marketplace," Niall Finnegan, senior director, Altus Helyar.
Productivity is being hurt by the lack of skilled labour, Finnegan said.
"Productivity on sites is a major issue now ... Productivity (is hindered) by the lack of skilled labour and the lack of new people coming into the industry."
But Finnegan stressed highrise residential development is buoyant.
The housing affordability index remains strong, despite rising prices, he noted.
In the GTA, mortgage payments constitute 22.1 per cent of an average family's income.
That's up only slightly from 21 per cent a year ago but well under the 30-per-cent "warning" zone.
Vancouver, on the other hand, has just passed that 30 per cent threshold this year.
"The fundamentals remain strong in the Toronto marketplace." Finnegan said.
"Vancouver is a market that has to be watched. Some of the lenders who are here today will appreciate that only too much."
Finnegan said the GTA's condo market is being fuelled by annual population growth of 108,000 people, or 44,000 households.
Eve Lewis, president of Marketvision, said Toronto's condo market has never been healthier and is arguably the largest in North America.
While more than 16,000 units sold in the GTA last year, only 6,800 sold in Chicago, 6,450 in New York and 7,500 in Miami.
"This is a city now that everybody looks to. Developers, designers and marketing people are coming to Toronto because they want to know why it's so successful here," Lewis said.
But she admitted industry watchers are wondering how long the good times will last.
"It's been a 10-year high. Everybody's nervous and everybody wants to know when the bubble is going to break," she conceded.
Shim said Urbanation is constantly on the lookout for signs of trouble but has yet to see any.
"The condominium market is staying the course and there are no real warning signs of any sort of downturn," she said.
"At Urbanation, we're obsessed with finding early warning signs of something bad to come and we don't see any in the numbers."
"We feel very positive about what's happening in the market," she added, explaining the strength is partially to the supply and demand for a wide array of products.
There are condos available in Toronto today priced anywhere from $112,000 to $12 million, she noted.
More than 101,000 condominium units have been sold in the GTA in the past decade.
"New condominium development has really played a key role in transforming our skyline," said Shim, noting there are 245 new condominium projects now in the sales or construction phase in the GTA.
She said strong population growth, a strong economy and affordability continue to drive the industry.
And standards are rising in terms of finishes, she added, noting that what was considered an upgrade two years ago is standard today, such as nine-foot ceilings, stainless-steel appliances, hardwood floors and granite countertops.
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