Daniel Tencer – The Huffington Post Canada

Condo developers in Canada’s three largest metropolitan areas are building too many condos — 36% to 68% too many, according to a new study from Royal LePage.

As a result, condo markets in Toronto, Montreal and Vancouver will experience some “turbulence” as developers shift down the amount of construction, economist Will Dunning said in the report.

But Dunning says fears of a potential bubble in the condo market are unfounded, because demand for them will remain high in the face of a growing shortage of rental units, among other reasons.

“An essential element of a ‘bubble’ is that demand becomes divorced from economic fundamentals and that has not occurred in the markets for condominiums,” Dunning wrote in the Royal LePage report.

All the same, the situation as it stands suggests condo construction is well above projected demand.

Dunning estimates that the three cities will require between 26,000 and 32,000 new apartment units every year over the next 20 years, but in recent years, developers have been starting units at an average rate of 43,774 per year.

Comment: And those all don’t complete at the same time. Some take 2 years, some take 3, some take a little more. So if 60-75% of those complete in one year, then demand is met. And what percentage of those are in each city, and what percentage of the starts are in each city? You cannot compare them all as a lump and then say there is a problem. What if Toronto is undersupplied, Montreal is correctly supplied and Vancouver is oversupplied? That math does not tell us anything, except that it appears that some has done some fuzzy math to support a position that does not have a proper foundation.

That works out to between 36% and 68% too many condos.”It is likely that future construction will slow to levels that are more in line with the growth rate and evolving demographics of the population,” Dunning writes. Over the next few years, Dunning says, “there may be some instability” in the market as it settles into a new, slower normal.

Comment: It is also not mentioned that starts today indicate sales from the past. It can take 1-3 years from a sales centre to a hole in the ground. This year’s demand is not next year’s demand, nor is it demand from 3 years ago. You cannot compare starts today, which reflect sales from years past, to today’s demand and then to completions that will occur in the future. Again, the math does not work. Past sales vs. current demand vs. future supply. How is that a fair analysis?

Toronto condos under construction

Developers may have noticed the gap between supply and demand. Dunning notes that there is a discrepancy between the number of condo units started and the number completed in recent years, suggesting a “bottleneck” of condos that have been delayed or will not reach completion.

Comment: Funny, that is not mentioned above. By this admission, it is the same as I pointed out, not all of those starts will complete at the same time. Not all will be on time. So it is a moot comparison.

But Dunning expects demand for condos to remain high in the medium and long term, in part because he expects a larger share of today’s youth to move into condos than was the case with their parents.

Comment: So demand will only ever go up? Thus the 26,000-32,000 current in need will increase over time. And the 43,774 starts mentioned above will not all complete on time. Thus, if demand rises 20% to 34,800 and completions are only 80% of the starts (with the HUGE assumption that they all complete in one single year, which will NOT happen) then we will have 35,019 completions. So demand will completely equal supply. And this is using Dunning’s admissions that demand will rise and not all condos will complete on time. I think a 20% variance over 3-5 years is fair. So his words contradict his math from above. And thus, there is no glut of condos. Simple as that.

Other research has suggested this could be the case. Canada’s urban infrastructure has not been keeping pace with population growth, meaning major cities in the country are experiencing escalating gridlock problems.

That is pushing more and more people to live in high-density areas close to where they work, PricewaterhouseCoopers (PwC) said in a recent report.

“Reverse migration from the suburbs to downtown areas [is] one of the most forceful and rapidly emerging trends in both corporate office and residential real estate,” PwC said.

Comment: And one of the main drivers behind the Toronto condo market.

The Royal LePage report found that just under 15% of households in the three cities are condos (for the country as a whole, it’s about 8%), but more than one-third (37.7%) of all new home construction in recent years was condos.

Comment: Yes, because the trend before 2000 or so was for houses. Then everything changed. Demographics changed, prices changed, land supply changed, renting changed, you name it. There was no such thing as a condo before the 1980s. And if people do not understand the fundamental demographic shifts of the past 10-15 years, the suburban flight, then they have no right to comment on real estate.

Dunning says demand for condos will be held up by demand for rental units. Many condos are bought by investors who intend to rent out their apartments, and very low rental vacancy rates in the major cities suggests there is a shortage of rental housing in Canada, Dunning suggests.

Comment: Further fueling demand for condos. Add all of these renters to your 26,000-32,000 above and you can see why we have a SHORTAGE in Toronto. We complete 15,000-18,000 condos in a good year, but create 30,000-50,000 new households. These people all need somewhere to live.

With standalone house prices in major cities moving out of affordability range, many homebuyers simply have no choice but to buy condos.

Comment: And here we have the 3rd major driver mentioned in this article alone. Add in cheap interest rates and you have now accounted for 90% of the real estate action, in Toronto at least.

The benchmark price of a detached house in Greater Vancouver is now $922,600, the city’s real estate board reported last month, while condos go for $365,600, on average.

In Greater Toronto, the average price of a detached house in November was $671,000, according to the Toronto Real Estate Board. An average apartment unit goes for $361,000.

Comment: Um, no. The average detached house in the 416 area of Toronto is $855,188. And condos in the same area average $385,968.

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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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