June 21, 2011
Are too many condominiums being built in Toronto?
Analysts have been sounding warning bells for more than a year that the market is being seriously overbuilt. But so far, sales and prices have been chugging merrily upward.
According to the Building, Industry and Land Development Association, last month was the best May ever for sales. High-rise sales are up by a staggering 50 per cent in May to 2,433 sales. This comes on the heels of an April that was also the best on record.
On a year to date basis total new home sales in the GTA are running 12 per cent ahead of last year, but that’s purely on the back of condominiums, since low rise sales are down from last year.
“Those high rise sales are extremely high and above normal demographic levels, suggesting there is a lot of investor activity,” said Toronto housing analyst Will Dunning.
On an annualized basis, May sales are running at 26,000 units per year, when demographic demand would suggest a rate of 14,000 to 15,000 per year, said Dunning.
“The economy is in a recovery and a lot of the jobs are focused on downtown, but even in a healthy economy I don’t know if those numbers would be supported,” said Dunning.
Bank of Canada governor Mark Carney warned last week that housing, particularly in big city condo markets were in danger of overheating, fueled by ultra-low interest rates.
The sale of a $28 million penthouse at the Four Seasons residences in Toronto last month by a foreign investor certainly caught the attention of the international real estate community. At 9,038 square feet, the condo sold for about $3,000 a square foot, by far the highest price paid for a high rise unit in Canada.
Nationally, Carney said prices are about 13 per cent above pre-recession peaks. In cities such as Vancouver, prices are up by a significant 25.7 per cent year over year, to $831,55 or 11 times the average household income.
In Toronto, where average prices are $485,000 prices are at 6.7 times income compared with 4.3 times income in 2001, according to figures by BMO Capital Markets.
“Prices simply can’t keep rising forever,” warned Capital Economics economist Dave Madani.
Capital Economics has warned of a bubble in the Canadian housing market and that a decline of up to 25 per cent in the average price over the next three years is not out of the question.
“The likelihood of a substantial decline in house prices over the next year or two is fairly high,” said Madani.
The investor driven condo market has been the subject of particular concern by some analysts. The Toronto market alone has more than 280 projects being marketed, thought to be the most in North America. Investors buy an estimated 45 to 60 per cent of all new units according to market research firm Urbanation Inc. One issue for investors is that while prices are rising, rents have barely budged, making it more difficult to see positive cash flow on their investments.
That could spell trouble in the market. If investors are unable to cover their expenses then they will pull out.
“Too many homes have been built over the last ten years,” said economist Madani in a report. “Over building is reflected on the supply side and the demand side, which is mirrored by the disproportionate share of total household wealth being accounted for by housing assets. Our concern is that these excesses will eventually lead to a house price correction.”
If investors started selling their properties because prices were falling, you would see an overflow of new listings in the resale market, said Madani.
“Such a situation would exert downward pressure on home sale transaction prices, or worse case scenario, lead to a noxious downward price spiral.”
However, some analysts have said that the condo building boom is sustainable, mainly because of a structural shift in the market. There is a shortage of new low rise housing in urban areas, which forces buyers into towers. And for some buyers, high rise living is now a much more acceptable lifestyle choice.
“These last few months have witnessed some incredible condo buyer demand,” said Stephen Dupuis, CEO of the Building, Industry and Land Development Association, which represents builders. “The primary factors driving the market appear to be affordability, low interest rates, and to give builders their due, some great building and suite designs.”
According to the Conference Board of Canada in a report Tuesday most Canadian markets remain in “balanced” territory, neither favoring buyers or sellers.
The Toronto market, which saw prices increase by 8.5 per cent year over year in May, is experiencing tighter than normal listings, according to the board.
Listings are down by about 20 per cent in May compared with a year earlier, creating upward pressure on pricing, said board economist Robin Wiebe.
Analysts expect more listings in the second half of the year which should help to cool the market. However, that could also depend on the extent of investor interest, particularly from overseas.
“Some Asian wealth is being invested in selected international housing markets as those investors seek out diversification and hard assets,” said central banker Carney in a speech last week.
As in Vancouver, an influx of Asian buyers primarily from China and Hong Kong have helped to buoy the Toronto market.
Some investors pay mainly by cash, and are not as affected by a rise in interest rates. However, they can also be fickle.
“They are mainly concerned about capital preservation, so they are holding on for the long term, they see Canada as a safe, stable place to park their money,” said real estate investor Ken Chin. “But trust me, they are also looking closely at the Toronto market to see whether prices have peaked.”
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