Economist revises his dire prediction: Condo market unlikely to face a crash because of construction delays

Susan Pigg – Toronto Star

The housing downturn created by Ottawa’s tougher mortgage lending rules could cost the country 150,000 jobs over the next two years, 35,000 of them in the GTA alone, says a new report.

Comment: But 90% of the effects of the new mortgage rules have come into effect. With 10-15% lower sales each month for the past 10 months or so, the market has adjusted to the new equilibrium. There are unlikely to be any other further changes.

The policy changes that made it tougher for first-time buyers to get into the market have contributed to a 13.5% drop in resale home transactions since they came into effect last July, notes Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals.

Comment: They are most of the reason, combined with fewer listings. Nothing else.

Condo apartment sales were down “a shocking” 46% in the nine months after the changes – in part because developers have pulled back launching new projects in the face of continued uncertainty in the market – and new home sales took a 43% hit, notes Dunning in his Toronto Employment and Housing Outlook report for the second quarter of 2013.

Comment: NEW condo sales were down, because new projects were down by around the same number. It is not like there were still the same number of units for sale. Supply dropped, sales dropped almost the exact same amount. Context!

Dunning warns that housing starts – which have already slipped considerably since last July – could fall to about 150,000 by the second half of 2014, a 25 to 30% drop from last year’s 205,000 which could wipe out 80,000 jobs in construction and related industries alone.

Comment: But the housing starts are back to where they were 5 years ago, it is not like we are dropping to some unheard-of low number. The record years are over and we are back to the usual high-normal trend. And it is not the fault of the new mortgage rates. It is builder stepping back to take a breath. I bet we see starts rocket back up in a few months, then everyone will freak out because starts rose an “astonishing” 40% or something, back to where we were, or even a little lower.

There would be further job losses because of reduced resale activity and spending on ancillary housing items which, together with construction job losses, could raise the unemployment rate about three quarters of a point, noted Dunning in his 12-page report.

Finance Minister Jim Flaherty has said repeatedly that he’s happy his efforts to cool the market, through four changes to mortgage lending rules over the past four years, are working. Since the changes, the latest of which effectively limits amortizations to 25 years instead of 30, Canada’s two hottest markets, Vancouver and Toronto, have cooled considerably.

Comment: Vancouver was already cooling, has been for years.

And while fears have eased that the Canadian housing market is headed for a crash, Dunning remains hugely critical of Flaherty’s “policy-induced housing market downturn” and even urges a return to 30-year amortizations, acknowledging “I doubt that will happen.”

Comment: And yet, nothing has changed. Those of us who work in the industry, who know real estate, everything is happening exactly the way we said it would. The economists and other “experts” were wrong, so now they are starting to agree with us. The fears only went away when those who were wrong finally admitted they were wrong.

“I do know that if Mr. Flaherty gets the outcome that he claims to want (weaker housing demand leading to price reductions), he is likely to get much more than he wanted, with a collapse in consumer confidence.”

Comment: No, because prices will not go down. I challenge anyone to propose a logical and rational scenario in which prices in Toronto go down.

That could push job losses far beyond the 35,000 Dunning anticipates for the GTA over the next two years, the report says.

While condo sales have seen a dramatic downturn, “starts have not yet been affected,” he says. That could hit toward the end of this year and be most pronounced by mid-2014, says Dunning.

In an ironic twist, Dunning says he’s revised his “wrong predictions of a looming correction” in the Toronto area’s condo market.

Comment: Finally! One honest man admits he was wrong. But he is the only one…

Dunning has come to believe, just in the last month, that one, or several, major bottlenecks in the construction process may protect the condo market here from the very downturn that had been widely expected. Developers cite approval delays and the lack of enough construction crews and equipment to handle all the new condo projects sold in the pre-construction phase across the GTA over the last two to three years.

Comment: Oh my god! Some of the exact reasons I have proposed for the new condo pause… not anything doomy, just simple effects such as slow city workers and staff/supply shortages. Nice to see others recognizing that there are explanations that do not involved ridiculous crash scenarios.

At the most, developers seem able to complete just 12,000 to 15,000 new units a year, notes Dunning (despite sales that hit a record 28,000 in 2011.)

Comment: Yet the negative side always screams and yells about “up to 35,000 units will flood the market tomorrow and WE WILL ALL DIE!!!“. Not true. Look back at the completion stats, most years are in the 15-20,000 range, with some peaks closer to 25,000. But then again, those are 90% paid for by the time the building is finished, something else that is usually left out. These are not all coming up available for sale, less than 10% hit the open market. Some are sold through the builder, some rented. Maybe 1,000 go on MLS over the course of 12 months, 80-90 a month. Yes, Virginia, the truth is very different than the hype and spin.

That makes it highly unlikely that completions will exceed demand and helps ensure that new condos will come on stream slowly enough so as to not destabilize the whole condo market.

Comment: Bingo! And again, of those 12-15,000 Dunning predicts, that would boil down to only 50-63 a month added to MLS. Condos are 70-80% sold before they start construction and 90% sold by completion. Some of the remaining 10% are sold through the builder or are rented. It bears repeating. Thus, 5% of 12-15,000 is only 50-63 new condos listed on MLS each month. HIGHLY unlikely to destabilize much of anything.

The real losers, however, will be folks who have bought pre-construction condos, expecting to move in over the next year or two. In reality, it will be more like 3.5 to four years, given the construction bottlenecks, he says.

Comment: Well anyone who believes the closing date they pitch in the sales office is more than a little mistaken. From sales office to hole in the ground to construction to completion is usually 3-5 years. Don’t believe anything else.

“Thus, projects that start construction this year and next year might not be ready for occupancy until 2018 or even later, resulting in some extremely annoyed clients and damage to the reputations of the builders.”

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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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