A few key concerns to consider when buying a condo in Canada

Romana King – Money Sense

Everyone is trying to predict whether or not Canada’s housing market will glide into a soft landing or flat-out crash in 2015 – and condos continue to spark the biggest debate. That’s because there’s a number of perceptions and assumptions that continue to fuel the belief that the Canadian condo market is doomed to crash.

Fear: Condos are over built in Canada

The most pervasive fear is that developers are overbuilding and this will eventually lead to a glut of empty condos, which will increase supply and push down prices, sparking a condo market crash. But Marc Pinsonneault, senior economist with the National Bank of Canada, spends his days analyzing condos in Canada’s big cities. He supports the belief that there’s overbuilding in the Canadian condo market – just not in the cities you’d expect.

Comment: Yet again I need to explain how overbuilding is not possible. Builders have to sell 70-80% of their units before they can start building. By the time the building starts going up, the builder is 80% sold or more. By the time it is complete and people start moving in, 90% sold. By the time it is registered and people take title, the average building is 98.5% sold. So if they are selling, how is it overbuilding? Nothing gets built unless it is sold. Sure, there are a lot, but they are all paid for.

According to Pinsonneault developers are not overbuilding in Toronto, Vancouver or Calgary – Canada’s three hottest real estate markets and the cities that boast some of the largest condo growth in recent years. Yet, the numbers show that developers in Montreal, Saskatoon, Regina and Winnipeg are overbuilding and if the market hasn’t already cooled it will, says Pinsonneault.

The fact is that despite an increase in building permit applications and an increase in completed, new condo units entering the market, supply really is keeping up with demand in Toronto, Calgary (although a little less so in Vancouver).

Comment: New condos enter the market at the sales centre stage – before they are built. Developers don’t build a condo and then offer it for sale. So they are sold BEFORE they are built.

“In Canada as a whole, the number of completed and unabsorbed condo units amounts to only two months [worth of supply], versus the more than four months [of unabsorbed condos that existed] in the 1990s,” explains Pinsonneault.

Comment: In the entire country. Montreal has a large inventory of built and not sold condos. Toronto has less than 1,000. In a market with 93,000 resales and 30,000 new completions. About half of 1% of the whole. Big deal.

Fear: Foreign investors prop up the condo market in Canada

The fear is that foreign ownership is propping up the condo market, particularly in Toronto, Calgary and Vancouver. And there’s basis for that fear. But like all things real estate, it really does boil down to location, location, location.

Comment: What do you mean “propping up”? Best estimates have foreign ownership rates in Toronto at 10-20%. But why does it matter? They pay the same as locals, the developer still gets paid, taxes are still due. Why do we care what their passport says?

Late last year, the Canada Mortgage and Housing Corporation released it’s first ever report that attempted to shed some light on who actually owns condos in Canada. Wildly publicized when it was released, the report highlighted the apparently low percentage of condos owned by foreign investors (defined by the CMHC as condo-purchasers whose primary residence is not in the city where the condo-investment is located). As such, the CMHC reported that only 2.4% of condos in the Greater Toronto Area and only 2.3% of Greater Vancouver’s condos are owned by foreign investors, respectively. Edmonton, Regina and Winnipeg had the fewest number of foreign condo owners, at 0.1%, while Calgary’s foreign ownership of condos was just over 0.2%.

But drill down and the CMHC numbers start to reveal an alarming trend: a concentration of foreign-owned condos in a city’s downtown core. For instance, 5.8% of condos in downtown Vancouver are foreign owned. In Toronto’s downtown core 4.3% of condos are foreign-owned. Surprisingly, the CMHC did not drill down Calgary’s condo ownership, however, it did unearth a big concern when it comes to Montreal’s downtown condos. According to the recent CMHC report 6.9% of the condos in Montreal’s downtown core and Nun Island area are foreign owned – compared to the city’s 2.3% average.

Comment: That is NOT alarming. I am in no way alarmed that 4.3% of condos in downtown Toronto are foreign owned. And you shouldn’t be either.

Foreign ownership is a key concern as real estate analysts fear that if the market turns, foreign owners will be more likely to put their units up for sale and this can flood the market, push overall condo prices down, and start a market crash.

Comment: But no one has ever come up with a compelling reason WHY the foreign owners would sell if the market turns. They have to put 35% down, so their payments are quite low. If they don’t buy with cash. Then they rent them out – not hard in Toronto with such low vacancy rates. If the market were to turn – WHICH IT WON’T – they have nothing to gain by selling. They will just keep renting it, making money. Selling when prices drop would mean they would lose money – why would they want to do that?

Montreal aside, most analysts are now far less concerned about the percentage of condos owned by foreign investors. CIBC World Market’s deputy-chief economist, Benjamin Tal, estimates that the number of “pure foreign investment” condos in actually a small segment of the market – and only slightly higher if you factor in families where one spouse continues to live overseas while the other lives with children who attend school in Canada.

Still, that doesn’t mean that the number of condos owned for investment purposes isn’t surprisingly high in Canada. According to a CMHC report, released in mid-2014, just over 17% of condo owners own a secondary condo-unit as an investment. (For statistical accurateness the CMHC combined the findings for Toronto and Vancouver.) This number doesn’t include the number of investors who rent out their condo and live in another type of accommodation (either a single-family home or a rental apartment) nor does it include investors who use corporations to purchase property.

Comment: I have always figured Toronto’s rental rate to be in the 20-25% range. But with a vacancy rate around 1.8%, Toronto obviously doesn’t have too many rental options. Heck, there were 20,000-odd condos completed in 2014, but 30,000-50,000 new households formed. Even with freehold thrown in, we are still not even meeting the bottom end of the estimate new housing units needed.

What should you do if you’re in the market to buy a condo in Canada?

So what’s a condo buyer to do? If you’re looking to buy in Montreal my recommendation would be simple: Don’t. Based on building starts and foreign ownership statistics, the Montreal market appears to be built a bit like a deck of cards, and this could spell disaster for the 2015 Montreal condo market.

If, however, you’re in another major urban centre, such as Toronto, Vancouver or Calgary, you may want to consider the location of your purchase. If you really want to buy a condo, and you plan on living in the unit for at least five years, you may be alright buying in the areas with a higher concentration of foreign owners, however, you may want to consider other areas with a smaller percentage of investor-owned condos. Or consider buildings with bylaws that impede or restrict rental units.

Comment: There is no way to tell what areas have higher ratios of foreign owners, so don’t bother. Buy a unit you like, something big enough that you won’t feel cramped a year after you move in. Make sure there are amenities around. In other words, look for something you like that you can afford. Don’t stress about investment value and all that – buy yourself a home,  a place to live. Talk to your financial advisor about investments.

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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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