End of GTA building boom overplayed: experts
Andrew Seale – Yahoo Finance
Despite a 20% increase in Toronto housing starts in March, TD Economics thinks the Greater Toronto Area’s building boom is coming to an end according to a recent report.
New home construction is far removed from its peak in 2012 hovering near 2008/2009 recessionary levels on a six month moving average with completions accelerating, according to the report, hitting three times their historical average in the first two months of 2015.
Comment: All depends on the cycle of project launches and the size of the projects. Smaller buildings account for fewer sales, we are seeing less big condos. But once the Mirvish-Gehry project on King West goes on sale, that would be a lot of new units. One Bloor West is another mega-project. Or the entire East Bayfront, there are a ton of units on the drawing board for that area. Just because there is a lull in one measure of building, that doesn’t mean much. Especially when other measures contradict it.
“The completions data we’re watching going forward, as growing excess supply of condos remains the greatest near-term risk facing the market,” says the report. “While new and resale condo sales remain strong (up 13% year-over-year), there are already three condos available on the market for each one sold, compared to the detached home market where there are only 1.5 listings for every sale.”
Comment: But new condo sales are up, condo resales are up, prices for both are up. There isn’t really an excess supply of condos remaining, the 1,600 that people talked about a month or two ago is nothing. There isn’t necessarily too many condos for sale, as compared to houses, there are just not enough houses.
Ultimately, condo prices have flat-lined with resale condo prices rising 3% year-over-year, but TD suspects the kickback from overbuilding will end up driving the prices down. Condos make up 80% of new home construction in the GTA says the report.
Comment: But people have been saying that for years and it just isn’t happening. Yes, price growth in condos is less than houses, but that is because there are enough condos to meet demand. Supply and demand are even, unlike houses where demand far outstrips supply. But condo prices are still rising, developers are still building. People are still buying them, so predicting any sort of drop is way premature.
“The increase in the supply of condos on the market is expected to push condo prices down by a moderate 3% to 4% over the next two years,” says the report. “Some of the weakness in the condo market will flow into the single-family home market as move-up buyers find it more difficult to move from a condo to a single-family home – we still see growth in single-family home prices but at a more moderate rate.”
Comment: Condo prices will NOT be 3-4% lower in April 2017 than they are now. I bet my license on it. As house prices continue to rise, it will only push more people into condos. If interest rates rise, it will make houses harder to afford, pushing more people into condos. As more and more people move to the GTA, there just aren’t enough houses for them to buy, pushing them into condos. There is no scenario out there that exerts negative pressure on the condo market.
But Dana Senagrama, principal GTA market analyst at the Canada Mortgage and Housing Corporation, is timorous when it comes to relying on construction starts to forecast the market.
“I think construction, while it is a good indicator of demand, you’ve got to look at new home sales as a leading indicator of how the market is performing,” Senagrama told Yahoo Canada Finance. “Construction only happens once a sale has taken place – with the condo market you’re looking at a two year lag.”
Comment: And you have to look at it over a longer period. Compare years to years, as individual month’s data is too variable and subject to too many influences. One large project launch and sales are through the roof one month, then no new launches in the next month and sales slide. One large project starts in a month and it shows starts rising, then falling the month after when there is no large project launch.
On the flipside, she does agree with TD’s forecast for condos trumping single detached home sales.
“Where we do expect somewhat of a pullback in the next couple of years is in the low-rise categories, particularly in the single detached market just because there are some real concerns with the lack of land and of course the price of units,” says Senagrama. “You’re looking at paying on average over $850,000 for a single detached home in the GTA and that’s not the price point that a typical first time buyer will be able to get in at.”
However, the best indicator that housing demand, and therefore starts, won’t be seeing a dip anytime soon is bottom barrel mortgage rates – which she doesn’t anticipate a change in over the next year.
“That’s been the primary driver of demand for the last decade in Toronto,” she says. “With the rates being so low, we’re still going to see demand for housing (which) will translate into construction starts going forward.”
Immigration will also bolster demand says Murtaza Haider, an associate professor at the Ted Rogers School of Management.
“Because of immigration, the population has been increasing in the GTA over several years,” he says. “That increase is the real reason for demand for new housing.”
He further eschews TD’s prediction of the building boom coming to an end.
“I see greater inertia in the GTA market then elsewhere where I see things slowing down like Calgary and Saskatchewan,” he says. “But the GTA market surprises me, ridiculous things happen in Toronto – I’d stay on the fence before calling an end to the boom.”
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Contact Laurin Jeffrey for more information – 416-388-1960
Laurin Jeffrey is a Toronto real estate agent 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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