Toronto’s real estate market may have had its “Wile E. Coyote moment”—that dawning realization that you’re headed for painful catastrophe and there’s nothing you can do to stop it.
That’s at least how Capital Economics economist David Madani has been interpreting the industry as of late.
With new condo sales dropping to record lows, it’s become clear that the Toronto market is cooling off. Opinions are divided, though, as to whether the latest numbers are signs of an impending housing crash long feared by Canadian finance leaders.
According to a report by RealNet Canada Inc., the number of new condos sold in the Greater Toronto Area in August 2013 sat at 633, an 18% drop year over year from sales of 777 in August 2012. RealNet’s data indicated that it’s the poorest August showing for new condos in a decade. Sales of high rise dwellings have dropped over 30% year over year from an eight-month period between January and August 2013, in comparison to the same time frame in 2012.
The remaining inventory of condos in the GTA has also been steadily rising over the past five years. According to RealNet’s data, in August 2013, the “remaining inventory” of high rise dwellings in the GTA sat at over 21,000 condos, up from less than 15,000 in August 2009. Remaining inventory include unsold units that are either completed, under construction, or in pre-construction mode.
Madani has been keeping a close eye on these latest developments in the housing market, and is a bit unnerved at what he sees. With condo building acting as the main driver of Toronto’s housing industry at the moment, he noted that the slowdown in sales will likely lead to a fewer number of housing starts and less homebuilding in the GTA in general, as well as job losses in the construction industry.
“We are seeing a level of building that I think is well above the population growth requirements,” said Madani. “That view is supported by the fact that inventories of nearly completed unsold condo units is actually at quite a high level, it’s not low.”
There are currently tens of thousands of condo properties being built in the GTA. In a February article, market analyst Ben Rabidoux calculated that between 25,000 and 28,000 of the 55,000 condo units being built in Toronto in 2013 will be completed by the end of the year, with 30,000 set for completion at a later date.
Madani also isn’t wholly convinced of the popular claim that Canada will soon experience a demographic shift of boomers moving into the condo market, as the building of single-family homes becomes more restricted in urban areas.
“There is some truth to that, because [in] Toronto for example, there is limitation as to where you can build low rise construction,” he said, referring to green belt policies aimed at limiting urban sprawl.
“But the danger here is in thinking that, therefore, everything’s fine,” said Madani. “Inventory data, which is at a fairly high level historically speaking, supports the view that clearly we’re building too many homes, and the fact that new sales have slumped so much is I think a reflection that investors have lost interest.”
In a recent note to clients, Madani wrote that housing investment may continue to assist GDP growth throughout the rest of 2013, “but there are still tentative signs that a day of reckoning lies around the corner, with housing likely to become a significant drag on growth next year.”
The macro effect could be widespread. “If [the] GTA’s any indication of what’s happening in other markets, I think there are significant implications for the overall Canadian economy,” Madani said.
But others are quick to put the brakes on speculation that Toronto’s slowing new condo sales are an indication of significant troubles ahead.
On Wednesday, the Conference Board of Canada released a its views on the Toronto condo market, and stated that the industry is not headed for a crash. Instead, Canada’s population growth should help to fill units, and banking regulations requiring that a certain number of units be pre-sold before loans are issued will stem the tide of any danger imposed by overbuilding.
“I think that we are seeing the Toronto condo market cool off, but I don’t think we’re seeing anything resembling a crash,” said Craig Alexander, chief economist at TD Bank Group.
Alexander noted that tighter mortgage rules (i.e. the new 25-year mortgage regulation implemented by Flaherty in the summer of 2012), and increasing mortgage rates have both played a role in “dampening” buying activity in the real estate market. He also noted the increased supply in the market as many condo construction projects are nearing completion in the GTA.
“I think when you put those factors together, you end up with some weakness in the condo market,” said Alexander. “But I don’t think it’s signalling a sharp decline in the market.”
The condo market is also “traveling a different path” than the single detached home market, said Alexander. Single-family home prices are rising, with “solid sales,” while there’s been a “pullback” in the condo market. This demonstrates that the “fundamentals for real estate remain good,” he noted, but that the condo market is facing a challenge with the amount of supply currently available, although condo affordability is still at reasonable levels.
“What we’re really seeing is a supply effect.”
While this all might add up to a moderate correction in the Toronto condo market, Alexander doesn’t believe a slowdown in new condo sales acts as a threat to the GTA economy, or the Canadian economy as a whole. There may be short term pain, but in the long run, “Toronto does need the additional supply of condos” due to expected population growth.
In sum, this is a short term issue, said Alexander.
“I don’t think it signals a major problem in the GTA real estate market or economy. I think it’s something that will be addressed, because over time there is going to be a demand for all of these condo dwellings,” he added.
“That doesn’t preclude the possibility that you get a correction in the short run, [but] even if we were to have a modest correction… I don’t actually think it would threaten the GTA economy let alone the Canadian economy as a whole.”