Toronto condo market booming again
Tamsin McMahon – The Globe and Mail
After years of slow growth, Toronto’s condo market has come roaring back to life.
Comment: Slow growth? Sales records in 2011, completion records in 2014 and Jan 2015. Second and third best sales and completions in the years in between. Price growth year after year after year… How is any of that slow growth?
Builders were putting the finishing touches on nearly 10,400 new condo units in January, eight times more than the monthly average over the past decade, Bank of Montreal senior economist Sal Guatieri said in a report last week.
The vast majority of the new condo units have already been sold. Still, the influx of new units has helped push the number of unabsorbed condos – those that have been built but not sold – to a 21-year high.
Comment: Of the 21,000 or so completions in 2014 and 10,000 in January, only 1,600 are unsold. That is only 5% – meaning 95% are sold. That ratio hasn’t really changed since 2000, just the absolute number has. With 1/2 the completions in 2013, there might have been 800 unsold units. Same 5%, but smaller number because it is 5% of fewer completions.
It is a dramatic rise for a city whose condo market has been at the centre of concerns among federal regulators and international organizations such as Deutsche Bank about rising levels of household debt in Canada.
Comment: No, it is NOT a dramatic rise. It is simple math, 5% of more completions means more unsold units. Units that will sell eventually.
The latest wave of Toronto condo completions and sales could mark a new upswing after a lull in the market. Sales hit a four-and-a-half year low last fall, while new condo completions had been falling for the past 18 months.
Comment: What? There were almost 40,000 new home and condo sales last year, up 41% over 2013. There were 22,000 condos sold in 2014, across the GTA. New condo prices were up 4% in 2014 over 2013. Picking 3 months out of the year to try to skew the data is dirty pool. Talk about the year as a whole. Just for fun, in Q4 of 2014, condo resales were up 8.3% and prices were up 3.8%. If we want the July-Sept period, Q3, then sales were up 12.9% and prices rose 6.1%. I cannot figure out where the slow fall statement came from.
Much of the new supply is the echo of a building boom that began in early 2012, when developers started construction in more than 37,000 new condo units in the city, well above the long-term average of 25,000 units a year.
Comment: Due to the record sales in 2011. And with big sales numbers last year, we might get the same starts bump in 2015 and high completions in 2018-2020. Condos are going to keep selling, starting and completing in higher numbers as more and more of them get built.
But the January condo boom also reflects the fact that banks and other lenders are returning to the market, now convinced the city’s condo sector isn’t poised for collapse.
Comment: Now, if we can only get the media on board…
Under pressure in the past from federal regulators, such as former Bank of Canada governor Mark Carney and former finance minister Jim Flaherty, lenders had largely retreated from Toronto’s condo market, working only with well-known developers and often requiring a high number of presales before they would agree to finance construction.
But officials in Ottawa have grown quiet and banks are now eager to fill holes in their loan portfolios, several lenders told a commercial real estate conference last week.
“It’s a very competitive market out there,” Frank Margani, executive vice-president of strategy and development at Fortress Real Developments, told the RealCapital forum. “Portfolios are down and everybody is scrambling to get their piece of the action.'”
Lenders are now willing to finance as much as 75% of the value of a project, up from 70% in recent years, said Chris Milne, vice-president of real estate banking at the Bank of Nova Scotia.
Comment: But developers still need 70-80% pre-sales in order to get financing.
Some have also eased up on their pre-sale requirements, typically asking that developers have buyers for at least 65% of their units, confident that builders will eventually find buyers for unsold units.
Comment: Maybe for Tridel, but not for most of them.
“There’s very little walk-away in the market,” Mr. Milne said. “We’re very different from the U.S. People sign with their name.”
Comment: Not when buyers have to put 15-25% down on their purchase. With the average new condo in the $455,000 range, that can be as high as $113,750 – people aren’t going to walk away from that!
With condo projects growing larger, more complex and more expensive, lenders have also been getting more creative about how they finance them, increasingly turning to syndicated loans involving multiple lenders, Mr. Margani said.
Comment: And smaller investors want in as well. They want into these group mortgages, as they are decent investments. For buy-ins as low as $30,000 people can out their money into a condo project. One that is 99% guaranteed – much more than stocks or even mutual funds – and pays them back 10-20% in 3-5 years.
Still, many say the market doesn’t appear to be headed toward the speculative boom of the past, when prices rose as much as 9% a year, encouraging investors to flip their units for profit.
Prices are growing at half that pace today. Investors are now looking to hold onto their units and rent them out and they have established a price ceiling of about $600 a square foot to keep prices from outstripping rent.
Comment: Exactly. Investors are in it for the longer run. It is very hard to make money flipping condos. It used to be that you could buy new for about 20% less than resale. Which made it easy to flip a few years later, when it was complete. Now, new costs more, and there are just too many out there, too much competition and supply to allow for profits.
“It’s actually sort of the magic number for the investors to still be interested,” Mr. Margani said.
January’s boom in new condo completions is likely to prove temporary and the numbers of new units should start to fall later this year, predicted Royal Bank of Canada chief Robert Hogue.
Even as they are growing more aggressive about lending to the condo industry, banks are becoming more realistic about about where the condo market is headed. “Sales are not what they were in late 2007 when you could sell a high-rise condo in a week it seems,” Mr. Milne said. “Now it takes awhile.”
Comment: Sure, it takes a month. But they do sell… they all sell.
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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.
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