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Toronto Real Estate

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Tag Archives: overvalued bubble

Canada’s condo market headed for soft landing

Brenda Bouw – Yahoo Finance

Canada’s condo market isn’t about to implode, at least not for the next couple of years, argues a new report that will put owners at ease but may frustrate those trying to decide when to buy.

Comment: I have been saying that for 10 years now. All of the actual evidence has always pointed to the market NOT crashing.

The Conference Board of Canada condo report, released by mortgage insurer Genworth Canada, forecasts a “soft landing” in Toronto and a pickup in condo sales in Western Canadian cities such as Calgary, Edmonton and Vancouver.

Comment: Funny, a soft landing used to mean a slowing down to essentially a flat level. Now it seems to mean just not crashing. But if sales and prices continue to rise, at whatever level, how is that a landing? A plane cannot land when it is rising, can it?

“Although many commentators view the Canadian condominium market as an overvalued bubble about to burst, we think it is only slightly overheated and enjoys sound economic underpinnings,” stated Robin Wiebe, senior economist at the Centre for Municipal Studies at The Conference Board of Canada.

Comment: To be blunt, those who see a bubble are simply wrong.

Toronto Condo Market

The Conference Board points to Canada’s improving gross domestic product, which it predicts will pick up to 2.4% this year and 2.6% next year. That’s up from 2% last year. Employment levels are also expected to rise 1.4% this year and 1.8 in 2015, which should empower more Canadians to buy homes. More Canadians are choosing condos for their convenience and affordability.

Comment: And like I have always said, an improving economy is tied to rising interest rates. So if mortgage rates do rise this year or next, the economy is also rising. And thus, as they said above, Canadians will have money and thus be able to buy real estate.

The Conference Board acknowledges critics who say the housing market in Canada, in particularly the condo market in places such as Toronto and Vancouver, are poised for a crash. However, it takes a similar view as many other Canadian economists who say mortgage payments, not house prices, are what drive home buying.

Comment: THANK YOU! Finally people are seeing the light. Ask anyone who owns a car and makes payments. I bet they have no idea what the cost of the car was – but they sure as hek know what the monthly payments are.

The report follows a recent Conference Board report calling Canada’s housing market fears overblown, using the same mortgage payment versus house price argument.

Canadian economists have been lining up to fight back against reports outside the country saying we have one of the most overheated housing markets in the world. The Organization for Economic Co-operation and Development (OECD) believes Canada’s market is about 30% overvalued when measured by affordability (price-to-income ratio) and 60% based on profitability of owning a house (price-to-rent ratio). TD Bank has responded saying the market is about 10% overvalued, based on housing affordability measures, while economist Will Dunning suggests Canada’s housing market is actually undervalued.

Comment: Because they all used incorrect ratios, shoddy data, or what appears to be purposeful cherry picking and spin to create the results they want. If Mr. Dunning and lil’ ole me can find the right numbers, so can every one else.

Last year, CIBC said Toronto’s closely watched condo market would face its “ultimate test” in 2014, which is when the market was forecast to be in oversupply for the first time. But CIBC economist Benjamin Tal said overbuilding didn’t necessarily mean a market crash.

Comment: And yet, condo sales are up in Q1. And prices. So I guess the Toronto condo market is passing the test with an A+.

“In many cities like Montreal, Ottawa and mostly Toronto, the test will be in the coming two years as the market deals with the new supply that is now under construction,” he said in an email Wednesday. “The demand-supply analysis suggests that this supply has the potential to slow the market with some decline in activity and prices likely, but it will not be enough to derail the market.”

Comment: But the supply that is under construction is mostly paid for. It will not “flood” the market. Just like it didn’t last year.

On Thursday, Tal released a note criticizing the lack of data to analyze Canada’s overall housing market, calling on policy makers to intervene now that there’s a new finance minister in place.

The note called “Flying Blind,” called the lack of publicly available information such as the share of foreign investors in the condominium market and the average down payment, to name a few, as “mind-boggling.”

Comment: We have decent estimates of the number of foreign investors, probably somewhere in the 5-20% range. And who cares, they put down 35% and hold their properties for the long term. What does it matter if they are born in Toronto or Hong Kong or Moscow or Sydney? And average down payment is moot, really. What matters – and what we know and is available through the CMHC – is the average outstanding mortgage balance. What someone put down 10 years ago doesn’t matter when compared to the current equity in the property. If someone put 5% down on a $400,000 house 5 years ago and the house is worth $500,000 today, which is more important? The $20,000 down payment or the current $100,000 in equity? I have more equity in my house now than I put into it. Most people do. And down payments tend to increase as prices rise, with $1 million and up homes having larger down payments than $350,000 properties. New developments tend to want 15-25% down, which skews the math. Another argument for further data that has nothing to do with the reality of real estate today.

No change is expected to happen soon, leaving economists to continue to predict the health of the housing market with available data. That includes Toronto’s controversial condo market, and how much building is too much.

Comment: If they use available data… Many pick and choose what they use. And with different numbers from different institutes, which data do you choose? Just remember, there are lies, damn lies and statistics.

According to Urbanation, a firm that studies Toronto’s condo market, there were 58,659 condo apartment units under construction at the end of last year in the Toronto region, but it expects about 19,000 will be completed this year due to resource constraints, weather and other delays. A lower number would lessen concerns about overbuilding, that would drive prices lower.

Comment: But whatever number is completed, around 96.5% will be sold at condo registration. And not all of the remaining 3.5% are put on MLS. The difference is 35 over the year, if they all hit MLS. More likely some are rented by the builder, sold privately by the builder through their sales office or disposed of in some other way. So the difference between 19,000 and 20,000 completions is most likely +/- 10 listings on MLS for the year. Not even one a month. When we bandy about huge numbers like 19,000 it can sound scary, but it always has to be put into context.

“We recognize that it creates certain vulnerabilities for the market should demand unexpectedly fall,” Urbanation said in a recent report on its website. “However we also don’t believe it should be used as the main basis for projecting a decline in condo prices.”

Comment: But demand won’t fall. As we saw in 2013, there were fewer new condo project launches. Thus, there were fewer new condo sales, as there were simply fewer available to buy. But then the resale condo market jumped, as those looking for new condos they could not find turned to the resale condo market. Sales jumped up to 20% in some months. All this after the “experts” predicted, yet again, the demise of the Toronto condo market. The demand is always there, it just fluctuates between new and resale units as the supply in each varies.

TD Bank warned recently that Toronto’s condo market will see prices drop by an average of 4% this year and next, blaming a drop in demand amid a continued building boom.

Comment: That is almost funny it is so wrong. I will eat my RECO license if condo prices fall 4% by the end of 2014.

“The number of new units scheduled to be completed in the GTA over the next two years is striking at a time when new condo sales are dwindling,” TD says, noting that high-rise condo buildings have accounted for 60% of supply of overall new homes in the GTA since 2011. That compares to 28% in 2000.

Comment: New condo sales are dwindling because of fewer new projects. It is not like the supply is staying steady and sales are falling. Supply is falling, bringing sales down with it. You cannot buy 100 apples if there are only 73 for sale. And wow, TD finally noticed the demographic shift away from suburban housing and into downtown vertical living. Many of us noticed this a few years back. Not news! Or even new.

The Conference Board expects condo sales in Toronto to be flat this year, but sees median prices ticking slightly higher, by 1.7%, that’s above Vancouver at 1.5% and well below Calgary at 3.3%. For Toronto, that compares to average price growth of 7.8% per year between 2009 and 2011, when sales were red hot.

Comment: For condos sales in Toronto to be flat, it would require a major shift. The first 3 months of this year have seen condo sales rise 7.4%, 9.6% and 6.9% respectively. With prices rising 7.6%, 6.0% and 5.1% as well. New condo sales rose 10.1% in February, according to BILD, and an astonishing 81.4% in January (though Jan 2013 may have been arbitrarily low). But no, suddenly this will all change for the negative… right as we enter the hottest time of the year, the spring market. Right…

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.