Canada's Condominium Magazine
Everything is cool in Toronto’s condo market, says cool, calm Benjamin Tal, deputy chief economist of CIBC World Markets, if you look at the situation in context. Tal has consistently taken the view that the prophets of doom in the media were mistaken when predicting a US-style real estate crash in Canada. Last fall, for instance, he said in a report that anyone who compared the Canadian real estate market with the pre-crash American market suffered from a “deep misunderstanding” of those markets. And today he reiterates that “zooming in” on the condo market for the sake of simplicity, as some commentators have done, without an understanding of the “broader housing market,” can easily lead to a misdiagnosis.
In fact, says Tal, the Toronto market is “reasonably balanced” but awaiting its “ultimate test.”
As before, Tal reminds us that the recent boom in condo construction cannot be viewed in isolation from the “structural shift” from lateral to vertical development that has taken place in the GTA’s housing mix, largely as a result of government policy. That shift has been so significant that today multiple units (condos) account for 75 per cent of all new housing starts in the GTA. While the number of newly completed, unoccupied condo units in the GTA (1,600) is in line with the long-term average, inventories of single-family homes are falling. The fall has been “dramatic” and inventories are at their lowest levels on record, Tal says. And this has driven the price gap between high-rise and low-rise housing to a record high as well.
What could be worrisome, Tal says, is the record high number of condo completions due to enter the market in 2013 and 2014. That number could reach 35,000 in 2014, much higher than the average of fewer than 15,000 seen over the past ten years. And since immigration to the city has slowed, with 20,000 fewer newcomers arriving than the average over the past ten years, the ability for developers to sell all of those condos is questionable. Household formation in the GTA is forecast to be about 31,000 in the next few years, and this is not enough to take up the projected housing completions, both low-rise and high-rise. Completions, in short, will outpace household formation. Developers are already beginning to slow down, and in some cases they have no choice. Tal says that credit is tightening up for “tier 2 players” as lenders “think twice” about extending credit. He estimates that developers today are facing a $2–3 billion “financing gap.”
What will this mean for the condo market? It does not mean, says Tal “an inevitable crash,” but a turning point in 2014. For one thing, the increase in supply will be good for renters. Condos are already the principal source of new rental space in the city with 22 per cent of built condos and as much as one-third of new construction currently for rent. Yet the rental vacancy rate today is just 1 per cent. New supply will increase that vacancy rate and slow rent inflation.
Investors in the market are a bit of a wild card. If the majority of them are “heavily leveraged,” meaning that they have put less than 20 per cent down payment on their properties, they could bolt, causing a big drop in prices. But Tal does not think that will happen. The majority of investors, he believes, will “absorb” the changing market conditions and stay in.
Tal predicts that in 2013 there will be 18,000 condo completions, followed by 23,000 completions in 2014.