Ian Austen – New York Times

Sandwiched between two rail lines in this city’s core, great factories once produced the finest Canada could offer the world: Magic baking powder, Brunswick bowling alley flooring and Massey Ferguson farm equipment.

Those factories and many others here have been long abandoned or demolished, but the area is bustling. It is now called Liberty Village and it is packed with high-rise condominiums, largely built over the last five years, with many more still under construction.

The popularity of the Liberty Village downtown condominium development is a highly visible sign that Toronto’s effort to create a livable city through densely populated neighborhoods is a roaring success.

Yet some Canadians see the frenzied building boom that repopulated this part of downtown Toronto and worry that it may end badly.

Comment: And their worries have proven to be unfounded, year after year.

Historically low interest rates and financially healthy banks eager to lend have spurred Canadians to shop for houses and condos. So builders built. Just over 55,000 new condo units are under construction in the city, many of them along Toronto’s condo alley, which starts at Liberty Village and heads east for about three miles through the downtown core. Median condo prices have risen 25% since 2009. Two-bedroom condos of about 850 to 900 square feet in Liberty Village sell for about $500,000.

Comment: And yet the average condo price has stayed stagnant for almost 2 years now. Pick your data to reflect your bias much?

For Toronto, this is crazy.

“There is no question that the housing market in Canada is overshooting,” said Benjamin Tal, deputy chief economist of CIBC World Markets. “Now the cocktail party conversation in Canada is: ‘Will this lead to a U.S. style crash?'”

Comment: What the hell does “overshooting” mean? That is even dumber than “oversupply”. Words that mean nothing that the doomdsayers and bubble mongers throw around to scare people. And anyone comparing Toronto to the US meltdown is dumb or purposefully misleading. Anyone with any understanding knows that there are no similarities. From subprime loans and predatory banking, no-income mortgages, teaser rates and the ability to walk away from loans – nothing at all like the solid and safe system we have here. Arizona and its 30% default rate are so far away from Toronto’s condo market that we might as well compare salmon and concrete screws.

The worriers are not just on the party circuit. Last month, the Bank of Canada said that the growing inventory of unsold condos in Toronto could eventually create “the risk of an abrupt correction in prices and residential construction activity.”

Comment: And yet, most everyone except Capital Ecomonics has finally admitted that there is no crash coming, there is no landing in sight. They have seen prices rise for a year after the new mortgage rules, and now sales are finally rising as well. There is no way to keep singing the collapse song anymore…

After almost five years of growth, high-rise condo sales were down 6.4% in May, according to the Toronto Real Estate Board. The worry now is that prices will also start to follow a downward path.

Comment: Wow, why use such old stats? Is it because the first half of July is showing sales rising 2.2% and prices up 1.8%? Those figures increasing does not suit your narrative, do they?

Strict mortgage rules and a centralized and conservatively managed banking system helped Canada sidestep the kind of real estate collapse that afflicted the United States in 2008.

Comment: You mean our banks did not commit crimes like the American ones did?

“In Canada during the recovery it was almost a crime not to take a mortgage,” said Mr. Tal, who works for a unit of the Canadian Imperial Bank of Commerce, one of the five large banks that dominate the country’s mortgage lending business. “We were able to borrow our way out of this recession, which is why we are now sitting on this elevated debt level.”

Comment: Actually, our economy never really tanked. There was never a dictionary-definition recession. Everyone said there was, but there wasn’t. We did not have the job loss that the US did. Our unemployment rate has fallen a full percentage point into the 7.x% range in the past 4 years. The US is still close to 10%. Our strong banking, mining and resource sectors helped us through, a strong tech sector in Toronto and Ontario. Mr. Tal knows this, he is just sounding the alarmist bell.

Canadian politicians do not want an American-style crash here. Jim Flaherty, the finance minister, recently scolded Canadian banks for discounting mortgage rates. He has been worried that Canadian household indebtedness has risen over the last three years. His government has tightened up mortgage lending rules by, among other things, shortening the length of mortgages.

Comment: Four rule changes in almost as many years. Slows thing down, but the real estate market keeps chugging. Proves it is not easy mortgages or low rates that are pulling people in. Heck, 2007 is still the banner year for sales, and mortgage rates were 2% higher than they are now.

Canadian banks have also kept tight rein on developers. Before developers are lent construction money, they generally must sell 70% to 80% of units in any project in advance. Given that, Urbanation, a company that tracks the Toronto condo industry for developers and lenders, estimates that 89% of the units now being built in Toronto are already sold.

Comment: And they know better than anyone. The figure rises even higher once the condo corporation is registered. These building are not being built on spec. Buyers must put down 20-25% on their unit, plus provide proof of mortgage from their bank. Then the builder must get 70-80% of their units sold the same way. Then, and only then, will a bank lend them the money to build.

Buyers who do get cold feet and abandon their purchases lose their 20% deposits, a significant amount in a city where the average condo sales price was $372,768 in May ($374,421 in early July). Ontario law also makes it easy for developers to recover the full purchase price in court.

Comment: Which is exactly what discourages speculation.

But other government entities encouraged the boom. Historically, Toronto, Canada’s largest city, met its housing needs like so many North American cities — by sprawling. But when the province of Ontario designated much of the undeveloped land northeast of Toronto as a greenbelt, many developers went downtown to buy former industrial land.

At the same time, buyers, particularly young ones, started to favor downtown living over long commutes on Toronto’s increasingly congested roads and overtaxed subway and commuter train system.

Comment: Demographic trends so many experts and pundits here seem to forget or ignore.

On top of that, Canada changed its immigration rules, so the 381,750 immigrants who came to Toronto from 2006 to 2011 were increasingly affluent or had wealthy relatives back in their home countries. For many of them, real estate as an investment, and condos in particular, are more attractive than low-interest bank accounts and more certain than stocks.

Comment: And they all need somewhere to live. Buying or renting, it does not matter, they need a home. Plus the kids moving out of the family home, coming back from univeristy, divorce, you name it. Housing needs only ever increase, year after year after year.

In its report, the Bank of Canada said that it was concerned that the high level of purchases by investors may have “boosted construction in the condominium market beyond demographic requirements,” an analysis disputed by Urbanation and others.

Comment: Except the investors are buying them to rent out, they are the new rental market. Not all of those 381,750 people are going to buy, many will rent. And there are very very very few new apartment buildings being built.

Low vacancy rates in Toronto make it easy for condo owners to find renters, while resale statistics suggest that most of those investor-purchasers are holding their units for long-term gains rather than flipping them for quick profits.

Comment: Contrary to what so many people believe. Foreign investors put 35% down (by law) on $300k condos. They have a $200k mortgage, which costs them about $1,600/month including condo fees and property taxes. Which is about the exact same amount as the average rent for that same condo. They hold it for 10-15 years and now it is worth $400,000 and they owe less than $100k on it, if anything. So their $100k investment is now worth $400k – which is why they do it. Not to try to flip it and make $10k, they want the bigger money.

David Wex, co-founder and partner of Urban Capital, a developer that is building, among other things, a major project called River City at the eastern end of downtown Toronto’s condo alley, remains cautious. He said that about half of the 650 units in one of his recent projects within walking distance of the city’s financial district were sold to investors. But like many developers, Mr. Wex limits the number of units anyone can buy in advance of construction to minimize his risk of borrowers’ defaults.

Comment: And unless they told him in person they were investors, there is no way for Mr. Wex to know how many of his buyers are “investors”. And what does that mean, in his context? Are they buying to flip? To rent out? How does he know they are not planning to live there?

“Any number of developers will tell you everything’s fine, but it’s a self-interested comment,” Mr. Wex said. “No one knows. There’s no developer out there that doesn’t want things to calm down a little bit. Maybe it’s calmed down too much, who knows?”

Comment: But everything is fine. Since everything is not bad, is not crashing, then by deduction it must be fine. If not fine, things must be good. Simple as that, if it is not bad, it is good. Self-serving or not, it is the simple truth.

Mr. Tal said that a gradual fall in prices through “a boring, slow slowdown” of as much as 10% “would be desirable.” He added that “the hope is that prices will basically stagnate for four or five years.”

Mr. Tal, like many economists, believes that Canada will come in for a soft landing, not a crash. But Toronto’s condo industry still feels uncertain.

Comment: But no economist has been right about the real estate market for 10 years now.

While Mr. Wex’s company continues to develop in Toronto, it’s also moving into Halifax, Nova Scotia, and Winnipeg, Manitoba. Those places, he said, “haven’t had the crazy boom.”

Comment: But they sure have been on the positive side of things!

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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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