Bloomberg News

Toronto condo builders are slowing development in a bid to avoid a crash after a decade-long boom led to 159 towers now under construction.

Comment: Are they slowing down for that reason, or are you just creating a newsy headline? Have builders told you this? No? Ah right, so it could just be a lull, a seasonal thing. Maybe because of the terrible weather we had all of the first part of this year? Maybe the city was slow with permits? Could be 100 different reasons, but you are going to speculate the worst reason you can think of so that the news looks bad. Nice…

So far this year, they’ve announced 13 new condominium projects, the fewest since the recession in 2009, when there were just three over the same period, figures from real estate researcher RealNet Canada Inc. show. In the same period last year, 29 new projects were announced, including Tridel Corp.’s Ten York, the third-tallest residential tower in the country at 75-stories when it was first marketed.

Comment: Q1 2012 had 20 degree weather on February – we have feet of snow the same time this year. If you don’t know that real estate is weather-dependent, then you have no right writing real estate stories.

“Most developers have their hands in their pockets right now,” said Brad Lamb, president of Brad J. Lamb Realty Inc., a developer and the city’s largest condominium broker. His firm, which is marketing more than 45 high-rise developments in the city, won’t start a new project until 2014, Lamb said in an interview at Bloomberg’s office in Toronto. Lamb said he has eight projects in Toronto and Ottawa “on the drawing board.”

Comment: Yet he did not say that he was not building because he was afraid and was trying to avoid a crash. Does Mr. Lamb know you put those words in his mouth, by implication? I would think he would not like that very much.

The slowdown comes as a near-record supply of condos comes to market in a city with the most towers being constructed in the world, according to BuzzBuzzHome, a Toronto-based real estate listings and research firm. Developers are trying to manage the slowdown as buyers retreat amid tighter mortgage rules, a slowing economy and the burden of record consumer debt.

Comment: Comes to market? You mean complete. That means that units that are already BOUGHT AND PAID FOR are done and people take possession of them. They are not being offered for sale and flooding the market. Figures from Realnet, who you quote above, show that around 10% of new condos are offered for sale once the owners take title. So even a heavy year like 2013 will be, with some 28,000 completions, will see around 2,800 new listings added to an annual sales total of around 85,000. So maybe 3% more… wow… so much extra inventory, what will we ever do?

The supply of new high-rise units reached 21,262 in February, 34% more than the same period a year ago and close to a record 21,696 in October 2012, RealNet figures show. About 61,000 units are currently under construction — the most ever — and a record 35,757 residential units will come on stream next year, RealNet said.

Comment: Clarify your data. Are there 21,262 new condos currently for sale? And the 35,757 coming “on stream” – what does that mean? Built? Sold? Offered on MLS? You are throwing around numbers that mean nothing. Like 61,000 units for sale. It can take 3 years or more for a large tower to be built, once ground is broken. Those 61,000 units could complete this year through to 2016 or beyond. It means nothing.

Canceled lumen

Developer Concord Adex postponed its previously announced Lumen this year, a 30-story building in a cluster of condos near the Gardiner Expressway, a major highway that connects the western suburbs with the city, according to BuzzBuzzHome.

Comment: Why did they cancel it? No sales? Crappy design? Bedrooms with cars zooming past the windows? Did they need 38 storeys to make financial sense and the city would only approve 30 storeys? You cannot simply through stuff like this around without context. Unless you are just trying to write a negative story.

Menkes Development Ltd was one of the first to announce this year, putting its 29-story 365 Church development on sale for purchase in March. Due for completion in 2017, unit size starts at 323 square feet among the smallest in the city.

“Condo prices are not going up now the way they have been,” said Finn Poschmann, vice president of research at the C.D. Howe Institute in Toronto. “From the developers’ side, they’re saying, ‘OK, enough is enough right now. We’re digesting a shift in the market as it is, and we really don’t need to be beat up more.’”

Comment: Builders have realized that they have hit the wall in terms of what first time buyers and investors will buy. But they are shrinking units, which pushes up the cost per square foot. Trust me, condos are not going down in price any time soon.

Sales dropping

Sales of high-rise homes in the city have dropped 34% since 2011 after rising 64% in the past decade until 2012. Prices have declined 5.5% over the past two years, according to RealNet.

Comment: New condos we are talking about here, let’s be clear. And if there are a record number of completions, how could there be less sales? More completed condos means more were bought. And taking a slice out of a longer term is cherry picking the data. Your two data sets overlap – how could sales drop from 2011-2013 when sales rose from 2002-2012? If sales rose in 2011 and 2012, how did they drop? Your math makes no sense…

Sales are weakening after the government tightened mortgage rules to curb record household debt and orchestrate a so-called “soft landing” in the housing market. Benchmark interest rates held at 1% since 2009 in the longest pause since the 1950s stoked a housing boom. The government has been trying to rein it in, shortening amortizations in June to 25 years from 30 years, the fourth time in four years it tightened home loan regulations. The Office of the Superintendent of Financial Institutions also introduced tougher standards for lenders.

Comment: And it worked – sales fell around 10-15%. But once we hit July and have two months with the same mortgage rules, we will not be talking about less sales anymore. The funny part is that numbers will probably rise again through the end of next year and will look strong against the weaker 2012 numbers. And the press will go on about rising sales – just as they did about the dropping sales – with no context. Mark my words!

The government has also pressured banks not to cut home loan lending rates below 3%, with Finance Minister Jim Flaherty saying March 19 that “we don’t want a race to the bottom on mortgage rates.” Manulife Financial Corp. withdrew a promotional 2.89% five-year fixed mortgage rate after the finance department called the bank to express the minister’s “displeasure.”

Comment: No, Flaherty did not tell banks to stay above 3% – he just said he was not happy when BMO offered the lower rate. They responded by offering 2.79% to their best clients, secretly. And I have seen ads in CIBC offering 2.99% mortgages with 3% cash back.

Governor warns

The effect of the government’s focus on rates and borrowing was that many first-time home buyers were priced out of the market and grew cautious as Mark Carney, the Bank of Canada governor, emphasized the risk to an over-heated housing market, Poschmann said.

“Everyone knows that soft landings are difficult to negotiate,” Poschmann said. “So you use multiple tools, you push on multiple buttons, and that’s what the government has done.”

Comment: And finally one worked. But most first-timers will just wait and save more, or buy something different, or look outside the 416.

Investors are beginning to hear about the high amount of supply and are backing off, Will Dunning, president of real estate market analysis firm Will Dunning Inc., said in a phone interview from Toronto. The government’s mortgage tightening has taken at least a quarter of condominium buyers off the market, he said.

Comment: No, they certainly are not. Why would they? Not when they can buy a condo and have a line up to rent it out. Vacancy rates are like 0.8% now, there are bidding wars on rentals. Landlords have their pick of tenants. This is exactly what investors want. I have heard from builders that they are banging on their doors asking why they are not building. The buyers taken out of the market are first-time buyers, owner-occupiers, not investors.

Attractive investment

“Low interest rates made condos a very attractive investment, I wouldn’t say a bubble but I would say too much activity,” he said. “There are multiple outcomes, including the investor saying ‘It’s time to get out of this market’ and if a lot of them say that at the same time, then you see prices fall.”

Comment: No bubble. There is no sudden increase, in sales or prices. Prices have risen around 3-8% annually since 1996 – how is that a bubble? And take off 2% for inflation, so it is more like 1-6%. Whoo. And sales have remained awfully steady for a decade now, how is that a bubble? Sure, more condos that houses, but if you can’t see the demographics behind that, then I can’t help you.

Prices of single-family homes in the city are continuing to rise due to the lack of available properties and space constraints on building. Homes are at a record premium of $204,000 ($200,866) to their high-rise counterparts, according to RealNet data. Since 2009, condo prices have risen steadily 25%, compared to a 45% spike for low-rises over the same period.

Comment: The difference can be even higher than that. I think you are talking new, since Realnet tracks new developments. But in the resale market, condos are averaging around $350-360,000 while detached homes are now over $900,000 – on average.

Still the Toronto Real Estate Board, or TREB, forecasts the slowest overall growth since 2008 this year, with average home prices of $515,000 in 2013, a 3.6% advance over 2012. The board forecasts 80,000 total housing sales this year, a 6.5% decline from last year and what would be the steepest decline since 2008.

Comment: What? We are now calling “only” a 3.6% price rise a problem? This is a sign of somethign bad? Seriously? People used to say 8% annual increases were a sure bubble, now 3.6% is a sign of market collapse? Really? And we tend to forget that 2011 was a crazy year and last year would have been just as bad had the new mortgage rules not changed things halfway through the year. If we have 80-85,000 sales, then it is right in line with the 10-year trend. Again, not the beginning of the apocolypse. Please, context folks. Saves me a lot of typing!

Two markets

“It’s a tale of two markets when it comes to price growth,” said Jason Mercer, head economist at TREB. “On the low-rise side of the market it’s been extremely tight. There’s a lot of competition out there and lots of inventory. On the condo side, you’ve got quite a bit of supply.”

Comment: Yet they both sell and both increase in value over time.

The boom in some ways has helped regulate the supply coming to market, Lamb said. Developers are all simultaneously building a record number of units, which means there isn’t enough construction equipment such as cranes, or enough workers to go around, delaying sales, construction, and occupancy. Developers saw this coming more than a year ago, Lamb said.

That may not be enough to engineer a soft-landing.

“We had a housing bubble in 1989 that burst, so there’s an example of where the government policy did not create a soft landing,” Craig Alexander, senior economist at Toronto-Dominion Bank, said in a phone interview from Toronto. “Real estate has generally been more volatile than the overall economy and it’s tended to underperform during recessions and then rebound early in the economic recovery.”

Comment: There was no government policy in 1989. People went crazy speculating and pushed prices up 127% in about 15 months. Then, it stopped. Dead. And prices dropped. But they never went below where they were when it began. Sure, if you bought at the peak you had to wait until about 2006 to see your house worth the same again, but that was something very very different than now. People need to stop comparing it. A 127% jump in a little over a year is very different that 5-6% a year for a decade and a half.

Land demand

Demand for space to develop downtown remains strong. Residential land transactions hit a record $2.75 billion dollars last year, encompassing all transactions for residential property, land to build residential properties, and for mixed- use purposes, according to RealNet.

Housing starts have also begun to rise again after reaching the lowest level in almost two years in January. They rose for a second month in February to a 184,028 annual rate.

“On lower volume, the housing price is still creeping higher — in the equity market that doesn’t last, it’s a divergence,” said Jeffrey Burchell, fund manager at Aston Hill Financial Inc., which manages $6.7 billion in North America. “You run for the hills when you see that.”

Comment: What? That does not even make sense to me… And why are we asking an asset manager to comment on real estate? I don’t comment on the stock market.

Aston Hill owns shares of InterRent Real Estate Investment Trust, an Ottawa-based residential multiresidence manager that owns about 4,700 units in Ontario.

“If you see the market going up on low volume, you just sell everything and walk away for a while,” Burchell said. “It’s bizarre that housing prices are still going up but volume’s down because all it does is it takes less to tip it all over.”

Comment: That does not make sense either. If volume is down, it is because there is less supply. High demand and low supply means lower overall sales. High demand and lower supply also pushes prices up. I am confused how this is read as a bad thing.

—————————————————————————————————–
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.
—————————————————————————————————–