Canada's Condominium Magazine
Benjamin Tal is not your average kind of economist. For one thing, the CIBC World Markets real estate specialist doesn’t like averages, at least not in the context of Canadian real estate. Real estate in Canada is far too multi-dimensional to be reduced to averages and generalities, he insists. With all of the different trends occurring in real estate in different provinces and cities, using blanket national averages is “useless.” How can an average that includes downward-moving prices in Calgary and upward-moving prices in Toronto and Vancouver, while prices in the rest of the country are more or less in line with inflation, be meaningful?
He also has a problem with the way many commentators invariably compare the present state of real estate in Canada with the US market before the crash of 2006. Again, this is “unwise” and “too easy” in Tal’s view. For one thing, there is no rampant overbuilding in Canada, as there was in the US before the crash. The ratio of housing starts to household formation is near its long-run average.
In cities like Toronto where it may appear that there is overbuilding, Tal reminds us that immigration is a key factor in limiting this. Three-quarters of population growth in Canada is from immigration, and many of the newcomers are in their “prime home-buying age” of 25–45 years. That growth in prime-age immigrants is also much higher than in the US. Further, Tal repeats his earlier claim about the importance of non-permanent residents in Canada. There could be close to 1 million of these (The official number is 770.000, but Tal says there are more.), and they drive demand for housing as well.
One reason why it’s unwise to compare the Canadian housing market of today to the US market before it crashed is that, unlike the situation stateside, there isn’t anywhere near the same degree of overbuilding in Canada relative to household formation. In fact, the ratio of housing starts to household formation is not far from its long-run average of 1.03.
Condos are stabilizing force in Toronto market
As for the apparently massive over-build of condos in Toronto, Tal says that is not a bad thing. Rather, condos have become a “substitute” to the low-rise sector, where the numbers of new singles and semis being built has remained “extremely low” since the recession. Condos help keep housing affordable. Many first-time buyers who haven’t got the income or savings to buy a “dream home” are turning to condos. “In this sense, the condo market is acting as a stabilizing, rather than destabilizing, force on the market as a whole.”
Tal seeks to debunk the other common myth that dogs the condo market; the notion that too many condos are owned by “overly optimistic” foreign investors who will, presumably, sell out if they fail to make adequate returns on their investment. Instead, the number of condos that are owned and rented out has met demand for rental units that the purpose-built rental market cannot meet. Somewhat surprisingly, Tal parts ways with Canada Mortgage and Housing Corporation, which estimated that just 20 per cent of Toronto’s condos are owned by investors. Tal puts the numbers much higher: 70 per cent of pre-sales, and 50 per cent of final sales are to investors, he says.
But who are these investors? Calling them simply “foreigners” fails to appreciate the reality of the situation. “The issue of foreign investors is largely misunderstood. The share of those investors in total activity is much smaller than perceived.” What is really happening, he says, is that money comes from abroad but the family lives in Canada. What’s more, in this kind of purchase, a much larger down payment is required. Combine that high economic commitment and the fact that the property becomes the family home and you have a “relatively safe” market segment, a sort of domestic-foreign hybrid.
Domestic investors who may at one time have bought Toronto condos for speculative purposes are not doing so now because capital appreciation is not what it once was, says Tal. Now the main motivation for purchasing an investment condo is capital preservation and rent income. Tal and colleagues estimate that half of rental condo units in the city are in this category. If renting condos becomes unprofitable due to higher interest rates and stalled rents, there could be a “wave” of sales in the resale market.
This is the real area of concern, says Tal, the balance between purpose-built rental units and the secondary market. The market will adjust, but it will not be a uniform, or “average” adjustment. It will affect different segments with different intensity.