Dynamics of the Toronto Condominium Boom

11
Jan

Dynamics of the Toronto Condominium Boom

In early 2007, the Conference Board of Canada and Genworth Financial Canada released a joint study on the Toronto condominium market. The report concluded that the price of a resale condominium would increase an average of 4 per cent annually — from $239,816 in 2006 to $292,077 by 2011.

Over the five-year period, the Toronto condominium market has evolved at a record-setting pace, scoring one record high after another. Although the housing market experienced a brief downturn in late 2008 due to the global financial crisis, it quickly regained its momentum in the spring of 2009.

Since 2006, the average condominium value has increased roughly seven per cent, annually.

In the second quarter of 2011, the 9,455 new condo units sold surpassed the record of 6,977 set in the same period 2007 — a 35 per cent increase, according to the condominium research firm, Urbanation. TREB reports 5,770 condominium transactions in the third quarter of 2011 — a 24 per cent increase over the same quarter of 2010.

The third quarter of 2011 numbers released by the Toronto Real Estate Board (TREB) reveal a condominium sales price for the City of Toronto of $356,182, on average. Greater Toronto Area condos had a $333,352 average sales price.

Through the end of the second quarter of 2011, 61 per cent of all sales consisted of high-rise condominiums, according to the CEO of the Building Industry & Land Development Association, Stephen Dupuis.

The Toronto Economic Development Committee states in its October 2011report that Toronto has 132 projects under construction — more than any other city in North America. By the end of the year, its total projects will exceed 200. Mexico City and New York City follow with 88 and 86 condominium developments underway, respectively.

Based on Toronto’s real estate market analysts’ estimates, about 90 per cent of the new condos have buyers committed under contract before the start of construction.

With tens of thousands of new condo units scheduled to beadded to the available supply, these numbers might shed some insights on the strength of the Toronto condominium market going forward.

As Canada’s largest city, with a population of 2,720,024, Toronto rates as the number one destination for 20 per cent of the estimated 200,000 new immigrants who move to Canada each year. About 52.4 per cent of immigrants settle in the GTA, which has a population of 5,741,400, according to the last count.

A sizeable portion of this immigrant population eventually buys homes. Withan average single-family home price of $465,369 in September 2011, Torontonians’ huge appetite for “affordable” home ownership undoubtedly fuels the demand for both high-rise units and town-home condominium units.

Typical condo buyers are young, single/married, and educated professionals who work downtown. They prefer to live and work close to Toronto’s centre and peripheral neighbourhoods. Shopping, public transportation, cultural activities, and entertainment are available just outside their doors.

Many baby boomers will turn 65 this year. Their children have left home, so downsizing from large, single-family homes in the suburbs rates highly on their agenda. They too desire the perks of living downtown. According to TD Canada Trust’s annual condo poll, 31 per cent of baby boomers buy these units with the intent of not moving again. Furthermore, they tend to spend, on average, $10,000 in upgrades.

Speculators represent another segment of buyers driving the Toronto condominium boom. They focus almost exclusively on the acquisition of pre-construction units. Many have made hefty profits capitalizing on the run-up in property values between pre-construction and project completion.

Investors operate with a different mindset than speculators. Instead of seeking a windfall profit by flipping the unit, they tend to enter the market for the long haul, satisfied with investing their money in a tangible asset, renting units, and profiting from the historical tendency of Toronto’s condominiums to appreciate. The value of condominiums in the GTA hascontinued anupward trend for the last 15 years.

Depending on the source, figures on the percentage of pre-construction condominium sales to speculators/investors range from 30 to 80 per cent.

The Bank of Canada recently announced its intention to keep the overnight interest rate at 1 per cent for the near future. This rate refers to the one-day interest rate banks charge one another to ensure institutions meet mandatory reserve requirements. The overnight rate has a direct effect on mortgages and consumer loans.

The central bank tends to keep interest rates low to stimulate the economy — especially if the global economy does not perform well and overall risks are increasing.

This strategy of low borrowing costs makes it cheaper for Canadians to buy real estate, cars, and other goodsand services. It also makes it easy to take on too much debt.

Whatever happened to that real estate bubble? You know, the correction many “experts” predicted would occur over the last year. Unquestionably, one of the greatest concerns for a real estate buyeris purchasing property at the height of the market, only to sit by helplessly as the value of the asset plummets.

Capital Economics says in its most recent Canada Economic Outlook report, that real estate prices could drop as much as 25 per cent over the next 36 months because of slower income and population growth. Some of the bearish analysts fear the market is already in oversupply mode, and predict as much as a 50 per cent decline in home values.

Many Americans have alreadyexperienced thisnightmare scenario. An estimated 25 per cent of U.S. homeowners find themselves with mortgages “underwater” — meaning the value of their homes is worth less than the outstanding balance on their mortgages.

Besides extreme valuations, when some markets rose as much as 25 per cent in one year, a multitude of other factors contributed to the carnage in the U.S. housing market. These dynamics include careless credit standards, risky mortgage products, and insufficient regulatory oversight.

In addition, endless refinancing, more debt, extreme speculation, excessive securitization of mortgages, and outright fraud played critical roles in undermining the American real estate market. The financial crisis in late 2008 served as the primary event that finally collapsed the “house of cards.”

In Nevada, Arizona, and Florida, real estate values have fallen more than 50 per cent off the market’s peak, which occurred in June2006. More than five years later, home prices in many states have failed to reach the values attained before the historic price run-up.

It is important to note the absence of many of the above elements from Canada’s housing and mortgage industries, which eventually torpedoed the U.S. market.

Nonetheless, the real estate bubble that burst just south of the border offers valuable lessons applicable to the soaring Toronto condominium market — particularly as it relates to valuation, speculation, and consumer debt.

The price of Toronto condominiums has gone up five to seven per cent annually —considered reasonable in a vibrant market. When buying, proceed with caution upon hearing reports of bidding wars or rapid price increases.

Even if Toronto condominium developers only break ground for new projects after securing a minimum of 70 per cent of the units under contract and financed, as reported, speculators present the wild card here. If the market cools, some will look quickly to dump their units and lock in some measure of profit.

RBC Global Asset Management’s chief economist released a report in July that revealed the income-to-debt ratio of Canadian households now surpasses that of Americans in 2011. Ten years ago, Canadians had a 120 per cent ratio; the figure has increased to 147 per cent. For each dollar of income, the average household has $1.47 in debt.

Inevitably, everything depends on the level of consumer confidence. When people have concerns about employment or the state of the regional, national, or global economy, they tend to spend less.

With the lowest interest rates in the history of mortgages and property values at the lowest level since 2000 (in some regions), the real estate and mortgage industries are still struggling to rebound.

Whether you are looking to buy or sell property in the current market, ultimately, only you can make the decision that is right for your circumstances. Keep your ears to the ground and avoid the emotions that typically accompany a hot market.

For sellers, now may present the best opportunity to lock in your appreciation to take advantage of the demand for Toronto condominiums and single-family homes. Consider listing your property nowas opposed toin the next year or two.

Real Estate Reports