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Toronto Loft Conversions

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Modern Toronto Lofts

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Unique Toronto Homes

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Condos in Toronto

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Toronto Real Estate

Toronto Real Estate

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Tag Archives: moderation

Toronto’s overheated housing market unsustainable

Jay Bryan, Postmedia News

[dropcap]W[/dropcap]hile Canada’s high-flying housing market continues to stabilize, it’s increasingly evident that one city – Toronto – is a glaring exception.

Comment: What about Calgary? Or Montreal? Or the bidding wars in Halifax and Winnipeg?

In sharp contrast to price moderation in most cities and a significant drop in Vancouver, where buyers are being priced out of the country’s costliest market, Toronto buyers are on a spending spree – one that looks as if it won’t end well.

New figures from the Canadian Real Estate Association show prices up by 10.5% in Toronto over the past 12 months, the only major city with a double-digit gain. In contrast, Montreal gained a modest 3.7% and Vancouver is down by 3.1%.

Comment: That was in March, but April is shaping up to be more of a 7% increase. Which means the price increase is slowing, which is good news. I think we can safely assume that March was an abberation. With February in the 8% range and now April around 7%, one month was just stronger than others… a statistical anomaly.

On average, national home prices in March – influenced by the big Vancouver market – edged down half a percentage point from an exceptionally high level this time last year.

This is in line with the expected trend for a relatively flat market this year, said Sonya Gulati at the TD Bank. TD predicts that national prices will increase 2.1% for all of 2011 as sales flatten.

Comment: Right, sales are softening, slowing down. That is to be expected, not some bizarre collapse of the market.

The bank calculates the average national price is probably 10 to 15% above a sustainable level, but doesn’t foresee any big drop, Gulati said.

Comment: What is the “sustainable level”? Why is that level sustainable? If prices remain flat for 5 years, does that level then become more sustainable? I love terms like that, they mean absolutely nothing!

Instead, it expects prices to drift down gradually once interest rates begin rising, probably in mid-2013. Its forecast is for a decline of 3.6% in 2013 and 4.3% in 2014.

Comment: I am not sure we will see a decline, that means we need to turn around 6.4% in the next 24 months… I think that is unlikely. Unless Vancouver totally craters. I think we will see something more in the 0-1% range, almost flat. But remember, that is a national average and has little bearing on any one particular local market. Toronto will continue to rise, though we will likely slow, through 8% or so this year, 6-7% next year and settle in the 5-6% range we have seen long-term over the past 15+ years.

But this benign national picture conceals growing stresses in the country’s biggest city.

Toronto, which accounts for about one-fifth of the whole housing market in Canada, has defied predictions, with sales remaining strong in spite of surging prices.

Comment: Defied predictions of the “experts” who do not work in the actual real estate industry. Most of us who do this for living were not all that surprised. I did not think March would hit 10.5% over last year, but 8% would not have surprised me in the least.

It’s not clear exactly why housing is “so out of control” in Toronto, says John Andrew, a real estate professor at Queen’s University.

Comment: Yes it is. Supply and demand. There are 10 buyers for ever seller, especially in houses. And with low low low interest rates, people can afford to pay more. Cheap money and low supply, basic economics.

But one factor, he notes, is the severe squeeze on the supply of single-family homes within easy commuting distance of downtown, which is helping to supercharge their prices. And those who can’t pay up have flooded into the less-costly condominium market, causing a boom that Andrew and other analysts now find worrisome.

Comment: Could not have said it better myself. Except that I am not worried.

Craig Alexander, chief economist at the TD Bank, is so fascinated by the frenzy of condominium construction that he counts the number of projects as he drives through Toronto.

“I would feel a lot better if I were counting half as many cranes,” he says.

Comment: But they are being bought by first time buyers and investors planning to rent them out. Never mind the empty nesters. There are 100-110,000 people moving to Toronto every year, who need somewhere to live. We have no rental market any more, no one is building apartment buildings. It is all condos. If it was not sustainable, it would not be happening. And one day it will slow down. But right now, a crane does not go up until 70-80% of units are sold, with 20-25% down. That is a big investment from a lot of people, a big vote of confidence in the project. And each one of those buyers has to show a mortgage approval to make their purchase firm.

That’s understandable. Andrew calculates that Toronto now has 143 highrise condo projects under construction, more than in any other North American city, with more on the drawing boards.

“Is there enough demand for all those condos? It’s hard to imagine,” he says.

Comment: But there is, the proof is in the cranes. If there are an average of 300 units per building and 70% need to sell to get funding and thus start construction, that means over 30,000 condos have been bought. With 20-25% down on the average sale price of $360,000, that is an investment of around $2.4-2.5 billion from the buyers alone. Never mind the very stingy banks that fund the rest of the construction costs. That is a huge foundation supporting the entire Toronto condo industry. And that is why it is solid and safe moving forward.

Worse, many purchasers appear to be foreign investors looking for rental properties as a haven from uncertainty in financial markets.

Comment: Why is that worse?

“When it’s an investment property, people are pretty quick to dump it when things get ugly,” Andrew points out.

Comment: But they have been buying and renting units for 10 years now – when is it going to get ugly? I have done the math in enough posts, I am not doing it again. But a $300,000 condo with 35% (required for non-citizen new condo buyers) down means costs that can be covered by $1,600 in rent, the going rate. So they put down $100,000 and 10 years later that same unit is worth $400,000 and tenants have paid down the mortgage to $200,000. So they made $200,000 in 10 years… not bad at all. And if they have 5 of them, they just made $1 million. They have no reason to dump them, they want to hold them and have the tenants pay them off. When the mortgage is 0 in 15-20 years, their $100,000 investment is now a $500,000 condo. Now it is just positive cash flow every month. Again, if they have 5 of them, they are pulling in $8-10,000 a month. The investor is making $100,000 a year – and assets worth $2-2.5 million. Why would they sell?

That could presage a hard landing once the pool of tenants thins out and rising mortgage interest rates squeeze investment returns.

Comment: With 100-110,000 people moving to Toronto every year, never mind those moving out of the family home, there is no shortage of renters – or first time buyers.

Douglas Porter, deputy chief economist at BMO Capital Markets, is similarly worried. While the national housing market looks increasingly stable, “I do think Toronto could have a fairly serious correction in the next couple of years,” he says.

Comment: Could. Or could not.

In the rest of Canada, however, conditions look far healthier. With sales and price gains flattening out, it’s likely that the growth rate of Canadian mortgage debt will soon dip significantly, Porter believes.

Comment: Except that higher mortgage rates will neutralize any price drops.

Since mortgages make up the biggest chunk of the worrisomely heavy debt load carried by Canadians, this could ease the pressure for federal officials to hike interest rates early or squeeze the housing markets with tougher borrowing rules.

Comment: But hiking the prime rate will not affect the fixed rates.

And behind the scenes, there’s an encouraging demographic trend that’s likely to keep housing demand from falling off a cliff, believes Stefane Marion, chief economist at the National Bank. He points out that the group aged 20 to 44, the prime source of new housing demand, is growing faster in Canada than any other large industrialized nation.

Comment: Which might have something to do with all the condos being built… they do tend to be popular with the younger folks and first time buyers.

Over the next five years, this cohort will grow by 3.7% in Canada, 42% faster than in the U.S., with immigration and the maturing of baby boomers’ children providing a new bump in housing demand. Even Quebec, the slowest-growing of Canada’s big provinces, will show a gain of 2.3%.

By contrast, most other big industrialized nations are suffering losses in this age cohort as their populations stagnate. The hardest-hit, Italy, Japan, Germany and Spain, will see this group shrink by seven% or more.

Canada’s demographic boost won’t immunize us against a severe shock, such as a new recession, but short of that, it could keep the housing market healthier than some expect.

Comment: Come on, we never even had a recession. We did not have 2 consecutive quarters with negative growth. We had one. And our economy is booming, quite the opposite of recession. Even the US, which has sucked for years, is growing. There is no recession coming – and it is wrong and misleading to suggest the possibility.

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.