Jamie Sturgeon – Global News

The country’s central bank is still nervous about Toronto’s overbuilt condo market.

Comment: How is overbuilt when we have 30,000-50,000 new households being created in the GTA and only 15,750 new condos being completed, on average, every year?

Citing a glut in new units in the country’s biggest city as a primary concern, the Bank of Canada warned again Tuesday that Canada’s housing market and the broader economy remain exposed to an “elevated” risk of a slide.

Comment: What “glut”?

While the bank continues to see a soft landing for the housing market, its latest report on potential threats to the country’s financial system details how a correction might unfold. And it isn’t pretty.

Comment: Again, this is a very big MIGHT. It is a MAYBE. It is only a possibility.

The number of pre-construction condos set to be built in greater Toronto – an indication of future supply over the next few years – has declined from the city’s peak in 2011, the bank says, but the net number of unsold units remains high.

Comment: But the ratio has stayed the same for years. A condo generally has 90% of units sold when it completes, that ratio does not change. But, as the number of condos increases, yes, the absolute number of inventory does increase. But the ratio has held firm for 10-15 years now.

According to estimates, 20,000 new units are expected to come onto the market next year, a figure well above what demand normally supports, according to a report last week from Royal LePage.

Comment: That would be amazing if that happened. Seeing as the most completions ever was just over 18,000 and the long-term average is only 15,750. I find it hard to believe that condo completions are going to jump 30% over the average next year.

Condo prices in Toronto are already flattening, the bank said, while the supply of new units could pressure outright declines. If condos don’t find buyers at a brisk enough pace, new projects will also face delays costing construction jobs – a major provider of employment in the greater Toronto area in recent years, the bank said.

Comment: But projects are not having trouble selling, name me one project that failed to meet sales and did not launch. Couldn’t name one, could you?

“If the upcoming supply of units is not absorbed by demand as units are completed over the next few years, there is a risk of a correction in prices and construction activity.”

Comment: Again, that is only an IF. A very big IF. A recent report showed demand for condos at 14,000-15,000 per year in Toronto. For sales alone. Never mind renters. And the average is 15,750 – almost bang on the sales demand. So where is the potential problem?

Things then start to look not so good for the rest of Toronto’s housing market, where prices have soared well above income growth over the past decade as ultra low interest rates that have spurred borrowers to take on larger home loans.

Comment: And yet, when you compare monthly mortgage costs to monthly income, houses are more affordable now than they were 20-30 years ago. Absolute price to annual income is not a useful comparison. Not when people buy based on monthly cost and mortgage rates have ranged from almost 20% in the 1980s to under 3% as recently as earlier this year.

“A sharp correction in the condominium market could spread to other segments of the housing market with stretched valuations, as buyers and sellers adjust their expectations of the future path of house prices,” the bank said.

Comment: Sure, IF a condo correction happens, it MIGHT spread. Note that there are two big MAYBES in that sentence.

“Such a correction could also have significant repercussions on the real economy, since the construction sector is an important component of economic activity,” the bank said.

A slowdown in the GTA threatens to ripple into other markets in two ways, the bank said. First, through sapping confidence among buyers and sellers witnessing developments in Toronto; second, tighter lending elsewhere.

Comment: And yet we had a fairly significant slowdown in the 12 months following the new mortgage rule changes. And then, everyone adjusted and we went back to where we were in 2011. It shows that even a year-long slowdown did not have any lasting effect.

“A correction in major metropolitan centre [such as Toronto] could spread across the country if price expectations are affected in other centres and localized real estate losses affect lending in other markets,” the bank said.

Comment: Yet Vancouver, the 2nd major real estate market in Canada, had a major slowdown for years, ending only recently. And that did not spread anywhere else in the country.

A chill could set in across much of the economy, the report said.

“Such an occurrence would generate widespread reductions in household net worth, market confidence and consumer demand, with negative spillover effects on income and employment.”

Smaller lenders and investors such as credit unions and private equity funds would be most at risk, the bank said. The loan books of the big banks and mortgage lenders would also be affected, though.

The Bank of Canada’s updated view largely reiterates concerns set out in June, the last time it delivered a report on the state of the Canadian financial system.

Comment: It is not their view, per se, but rather a potential situation that they discussed. It is nothing but a big “what-if” scenario written down in a report. It is not what they think will happen, it is only an illustration of what could happen IF a lot of IFs happen all at the same time.

Since, Toronto’s condo market has cooled but the broader housing market has shown renewed strength.

Comment: Nope, the Toronto condo market is not cooling. November saw 416 condo sales rise 12.7% with prices up 10.0% – and the GTA as a whole had sales rise 13.1% and prices rise 7.4%. Mid-December sales are up 18.5% in the 416 and 43% in the 905! Prices are up 7.9% in the 416 and 5.4% in the whole GTA. That sure does not look like a cooling condo market to me!

Experts like economists from TD Bank and Royal LePage contend that echo boomers who are unable to afford a single family home in Toronto but are unwilling to buy far afield in the suburbs will mop up the excess supply of condominiums.

Comment: As they are currently doing. Never mind the investors buying for renters.

Ontario’s economy is also expected to improve over the next couple of years, adding as many as 300,000 jobs. The unemployment rate is expected to drop to 6.3%, according the Conference Board of Canada.

Comment: Which will only fuel more real estate buying.

Underlying the gloomy worst-case scenario is the record amount of debt Canadian households have accumulated in recent years, exposing them to economic “shocks” they might otherwise have been able to absorb, the bank and others say.

The central bank report said that despite a resurgence in borrowing among households this year, is expects debt levels to resume “moderating” and the above risks to “diminish over time.”

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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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