Toronto Condo Market – Boom, Bust – Banks Divided

Toronto. Again.

The question is – will the growth continue, even with 21,000 units coming on-board this year and the same scheduled for next. The Greater Toronto Region has about 5.2 million people in it, and a growth rate of about 0.4%. That would suggest about 21,000 new people (including births) – if we average it out to the 2.1 people/family, that’s about 10,000 new units required. So we have an oversupply of 11,000 units/year in just condos alone – not including low-density housing.

To this the Bank of Canada, in regards to Toronto, has indicated:

The supply of completed but unoccupied condominiums is elevated, which suggest a heightened risk of a correction in this market.

In July of this year, the RBC said:

We believe that the attractiveness of investing in condominiums will gradually diminish … [and the overall housing market will be] mainly flat in 2011 relative to 2010, with some wakness emerging next year.

If you’re pro about market growth (average unit cost in November was up 8% from last year), National Bank Financial analyst Stefane Marion indicates that the current inventory of Toronto units could sell in 19.3 months – well below market lows of up to 48 months historically. You can also see in that Montreal, a reasonable close major metropolitan, condominium construction is up 68% year over year. It is unclear if this is added competition or an additional indicator that growth continues in Canada – especially the eastern heart.

I still think it’s due for a correction – earlier reports this year indicated 70% of new condominiums are investor funded. With world markets still tumbling (down 2% yesterday in financial sectors) investors will start limiting their exposure to a housing bubble. This in itself will start the downward trend on cost.

 

Follow Up To Post “Toronto Condo Sales Are Freaking Insane”

While the post was just two days ago, there have been two great articles that back up my concerns, and add a few more. For good reading (what I see) on the likelihood of a Toronto condominium bubble burst – check out the following:

Troubling Signs for Toronto’s Condo Market

Absorption Rates

While I do shout concern about a correction in Toronto, I don’t think it’s anywhere near Miami’s folloy, where prices dropped 50% from their peak. While Toronto shows the same investor levels for pre-construction purchase (70-80% in Toronto, and then in Miami) – Toronto has two things that would help mitigate some drop: it is a financial centre (financial center condos will always outperform the rest of the market), and it’s not a snowbird getaway – it’s a primary residence location.

The bigest take away from all these articles recently – $800+ psf is definitly already gone, and it looks like reasonable top end cost is about $700 at the moment, and a 20% reduction or bubble pop would put top costs at $560-$600 psf.

Over Supply, Investor Demand, Interest Rates, May Decimate Toronto Condominium Prices

I often suggest to my American friends that the read the Globe and Mail for a non-partisan, third-party, observation of the US. They are so bombarded with the us-or-them approach in US media (everything is either a Republican source or a Democrat source) that the Globe’s articles on US politics and economy have become a powerful neutral source of information for many of them.

So it’s in the same light that I read a recent Wall Street Journal on the likelihood significant correction in the Toronto condominium market. I mean, if a US paper wants to spend reams of paper informing their citizens about a growing risk in our condominium market, maybe its worthwhile listening.

To summarize –

1. The WSJ equates Toronto to Miami – where foreign buyers created a real estate bubble that burst, leaving exceptionally large numbers of abandoned units.
2. There are 40,000 units under construction, increasing the supply by 20% in the next 24 months.
3. Bank of Canada Governor Carney has expressed condominium prices are being driven by investors not owners
4. 60% or so of all pre-construction unit sales are investors, not owners
5. Ratios are rising rapidly between yearly rent and unit cost (moving above the magic ratio of 1:16 yearly rent to unit cost)

As the condominium prices driven by investor demand have risen to about $305,000 – even a one percent increase in lending rates would require $255/month increase in rent to cover the new rate. Interest rate increases matched with a 20% increase in available units (which should help suppress the costs – or in investor terms, equity) in units, Toronto could see a very big and self-feeding drop in unit prices over the next two years.

So says a non-partisan observer looking in.