Garry Marr – Financial Post

The country’s condominium sector continues to show signs of a serious slowdown and a report Wednesday suggests lenders are growing wary of the country’s largest high rise market.

Canada Mortgage and Housing Corp. said new home construction fell to 174,858 in April on a seasonally adjusted basis, down from 181,146 in March. The drop for urban multiples — largely made up of condominiums — is stark when compared to a year ago. There were 7,951 starts in April, a 41% decline from 13,458 a year ago.

Even going back one month, the sector is showing signs of a pullback. Urban multiples were down 3.5% in April from March at an annualized clip of 93,469.

The biggest worry in the Canadian housing market has been overbuilding  in Toronto and Vancouver, said Sonya Gulati, senior chief economist with Toronto-Dominion Bank. She said that while this has drawn concern from bodies like the International Monetary Fund and even from the Bank of Canada, the recent slowdown in building could be good thing and prevent the type of crash that has happened in other markets.

Comment: So builders are slowing down, which is a good thing. Yet the lower number of projects and fewer starts is being trumpeted all over as one of the seven signs of the impending real estate apocalypse. We do have to decide which it is.

“If the slower pace continues to prevail, the concerns of too many projects in the absence of actual demand will subside,” said Ms. Gulati.

According to the CMHC, the drop — largely centred on the Toronto condo market — puts the number of new units being built at roughly the same level as the number of new households in need of a roof over their heads. The drop put the number of new starts “closer to its historical average and is in-line with estimates of household formation,” said  Mathieu Laberge, deputy chief economist at CMHC, in a statement.

Comment: So demand has slowed, thus supply is also slowing. Doesn’t this make a lot of sense? I imagine builders have a pretty good idea of the market before they launch a $200 million project, doncha think?

If the trend of less shovels breaking ground in Toronto is a positive development for prices, owners may be able to thank tighter lending.

A report from CIBC deputy chief economist Benjamin Tal suggests credit problems may have a major impact on the housing market in the greater Toronto area.

The economist suggests Toronto condo developers are running out of credit and the $2-billion to $3-billion shortfall could mean serious delays in construction — good news for a market that would be over-saturated with buildings if all the slated new condos were to come online as scheduled. “You are going to see major, major delays,” said Mr. Tal, in an interview.

He says that many lenders are “thinking twice” about loaning money to developers, even when they have reached a threshold of 70% of pre-construction sales, the traditional level needed for a construction loan. Mr. Tal says it is second-tier developers being hit by the credit crunch and he’s projecting there will be 18,000 condo completions in the GTA in 2013 and 23,000 completions in 2014.

Comment: Many buildings need 80% sales now, not that new. But this is good. Slowing it all down, from new condos through to first time mortgages.

“The practical implication of such a scenario is potentially large-scale delays in project delivery,” says Mr. Tal, in a report. “[Developers] will get the money but they will have to pay more for it and it will take more time.”

Condominium contracts are already being drawn that allow greater flexibility for when a condo is completed, potentially avoiding penalties typically paid to the consumer when a condo is not ready on schedule.

Mr. Tal doesn’t see a crash coming but he does see rising vacancy rates and less opportunity to pass on rental rates increases. The key for the market will be how leveraged condo investors are.

Mr. Tal says if the majority of investors have 20% down — something he believes to be true — there will not be a mass exodus from the market.

Comment: They have to, some of the recent mortgage rule changes forced investors to have 20% down. And if they are not Canadian citizens, then they have to have 35% down. I would think the average is in the 25-30% range.

While the condo sector may be under siege, the low-rise single-family home has never been better poised to rise in price. Condos now account for 75% of new construction in the GTA, making the low rise home more of a commodity.

Comment: The condo sector may also NOT be under seige. I have seen no barbarians and nary a catapault downtown recently.

“You could have a correction in the market where everything goes down but I suggest [low rise homes] will go down less than the condo market,” Mr. Tal said.

Comment: You could also NOT have a correction. Like the one we are NOT having and have NOT been having for years now.

A report from condo research firm Urbanation Inc. shows sales are falling fast in the Toronto sector  with first quarter activity down 55% from a year ago.

Comment: Which we just discovered at the beginning of the article is because there are fewer projects launching. It does not mean there are the same number of available units but with 1/2 the sales. Both supply and sales are falling together.

“We are in an adjustment period. We are coming off obviously extremely strong [sales levels] for a fairly extended period of time,” said Shaun Hildebrand, vice-president of Urbanation. “This was expected, I’d be more concerned if sales numbers keep growing.”

Comment: So now again you say that lower sales are better, right after implying that it meant something ominous. It is amazing how the same information can be spun in a negative or positive way, depending on the person using it.

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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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