Canada's Condominium Magazine

No glut, no shortage in Canada’s housing supply: BMO

A senior economist with BMO Capital Markets poses three rhetorical questions about the state of the real estate market in Canada, and particularly in Toronto. Too much construction? Too many condos? Too many listings? The questions refer to the three perennial fears that “plague” the Canadian housing market, says Sal Guatieri in a special report released today. Those fears pertain to a perception that new home construction has been elevated, that unsold condo inventory is high in a few cities, and that the supply of resale homes in some regions is high. A “deeper dive” into the data shows, however, that fears of a housing glut are exaggerated.

On the question of too much construction in recent years, Guatieri says it was actually needed to make up for a “subpar” trend in the previous ten years. In Toronto, which he ironically calls “ground zero for over-building fears,” housing starts have been in line with historical norms and with household formation needs. Making the inevitable comparison with the US housing market crash, the BMO economist notes that pre-crash housing starts south of the border were running 40 per cent above normal. In Toronto, by contrast, starts have been less than demographic needs since 2013.

As for the supposed glut of condos in Toronto, which is largely the result of a construction burst three years ago, Guatieri says the condos are in fact compensating for the dearth of single-detached homes. Total inventory including pre-construction and under construction is now below what it was one year ago, and that inventory is “likely” headed lower, thanks to strong demand and slowing construction.

If Toronto truly had too many condos, the rental vacancy rate would be rising, while rent and prices would be falling (no one pays more for something that is in abundance). The city is building a lot of condos for good reason—they’re needed by the tens of thousands of people moving to the region each year who can’t afford a detached home (partly due to development restrictions) or simply prefer the condo lifestyle.

Absorption of the condo inventory will continue as demand “stays healthy,” and the economist sees no sign that that will not happen. “The city is building a lot of condos for good reason: they’re needed by the tens of thousand of people moving to the region each year who can’t affor a detached home, or simply prefer the condo lifestyle.”

The question of too many listings pertains more to cities outside of Ontario. Listings in Ontario, especially Toronto, are “lean.” Record-low mortgage delinquencies mean fewer distressed properties for sale. Meanwhile, the sales-to-listings ratio is normal, with about two sales for every listing.

The bottom line: Canada has “neither a glut nor a shortage” of homes, excepting “highly coveted” detached homes in Toronto and Vancouver. As many others in the banking profession have said repeatedly, as long as there is no shock to income or affordability, a sharp increase in unemployment or rise in interest rates, housing demand and supply will remain balanced.

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