John Pasalis in Toronto Real Estate News
Two housing reports released this week have been making headlines across the country. The reports from Scotiabank and CMHC are forecasting a 'soft landing' for Toronto's real estate market and a low risk of a major correction.
A 'soft landing' means a few things for Toronto's real estate market:
- A record number of condominium apartments will start construction in the GTA in 2008. In 2009, condominium apartment starts will dip slightly to the second highest level on record. Low-rise home construction will trend lower.
- Sales of existing homes will moderate over the next two years, but remain very high from a historic perspective.
- The average selling price for existing homes will grow at a more moderate pace in 2008 and 2009.
- Job creation will remain positive in the GTA, but growth will be slow.
The following two charts are from CMHC's report and show their forecasts for resale home sales and average prices for the Toronto area.
But the most interesting story coming out of these reports has to do with the positive outlook for Toronto's condo market.
From the CMHC report:
As [condominium apartment] projects complete, some of these investors will choose to sell their apartments in order to take advantage of increases in market value which occurred during the construction period. These increased sales are not forecast to result in declining values for condominium apartments. Currently, the resale market is very tight. Sales accounted for half of active listings at the end of 2007. Moreover, the number of completed and unoccupied units is very low, ranging between 1,000 and 2,000 units. These tighter market conditions resulted in average condominium apartment prices growing at an annual rate of over 10 per cent in 2007. As more supply comes into the marketplace over the next year, however, the rate of price growth will moderate to approximately five percent in 2008 and 2.5 to three per cent in 2009.
From the Scotiabank report:
Canada’s real estate market is not overbuilt. While inventories of unsold homes are trending higher, the number of unabsorbed units, including condominiums, remains well below prior cyclical peaks in most major centres.
These forecasts are interesting because most industry watchers, including myself, have raised some concerns about the outlook for Toronto's condo market (see: What Does the Future Hold for Toronto's Condo Investors? Windfall or Bust?) . The key unknown is how many of Toronto's new construction condo units are owned by investors. CMHC suggests that it could be as high as 33% while other reports suggest the number is as high as 85%. The principle concern is that if many of these investors choose to sell their condos once their building is registered, we might see an oversupply of units on the market which will in turn have a negative effect on prices.
My principle concern with CHMC's conclusion is that they are forecasting that the condo market will have two separate negative factors working against it - increased supply due to investors selling their units and fewer first time buyers in the market - but will continue to appreciate, albeit at a more gradual pace. Had they concluded that the potential increase in supply due to investor sales would be mitigated by continued strong demand from first time buyers, I would have been a little more comfortable with the conclusion. But the fact that CMHC anticipates both an increase in supply of units and a decrease in demand from first time buyers raises some questions about their forecast for continued appreciation in the condo market.
Download the Scotiabank Report.
John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John
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What Does the Future Hold for Toronto's Condo Investors? Windfall or Bust?
The Real Estate and Indebtedness Mafia willfully ignored or publically downplayed by industry participants. The mainstream media are their paid shills (grab a weekend paper and look at the percentages of advertising which is real estate or lender related!). Instead we should all worry just a little (but not too much) about...
a) the fact housing affordability is at its worst level since the last housing bubble burst [RBC. Housing Affordability. Mar-2009, p.1]
b) the fact that real housing prices have increased substantially more than during the last three housing cycles dating back 40-years (all of which ended badly) [Scotiabank. Real Estate Trends, 26-Feb-2008, p.2]
c) the fact that real housing prices in Canada have risen more from trough to peak than in the U.S., where prices and the general economy are now tanking [Scotiabank. Real Estate Trends, 26-Feb-2008, p.2]
d) the fact that Canada's housing prices-to-rent ratio is higher than in any other OECD country save Spain and 90% higher than the long-run trend [OECD Economic Outlook No. 82, December 2007. Data table can be found in the housing price ratio tab of http://www.oecd.org/dataoecd/6/5/2483894.xls]
e) the fact that Canada's housing prices-to-income ratio is 32% above historic trends and substantially above ratio which prevailed when the last housing boom bubble popped in the late 80’s / early 90’s [same source as (d)]
f) the fact that the unprecedented run-up in prices have been fueled by a proliferation of risky lending practices such as (i) a decrease in the required down payment from 10% to 0%, (ii) an increase in the allowed amortization from 25-years to 40-years, (iiI) the proliferation of 7% cash back mortgages and other lending gimmicks (teaser rates, step mortgages, skip a payment, builder rate buy downs, etc.), (iv) the proliferation of home equity lines of credit, and (v) lenders not being on the hook for the vast majority of risky loans they write (CMHC guarantees low-down payment and/or extended amortizations)
g) the fact that studies show typical consumers do not fully understand the implications and risk of low down payment, long amortization and gimmicky (e.g. 7% cash back) mortgages. How many consumers do you think have run a scenario analysis which asks, “what would happen if interest rates went to 8% or 10%? What would happen if my partner or I lost our job? What would happen if real estate prices dropped by 10%, 20% or 30%? What impact will extending myself for this house have on my retirement plans?”
h) the fact that housing bubbles around the world are beginning to deflate (assuming they’re not already well underway). By way of example, the UK (admittedly a worse market then ours) mortgage lending in the first quarter is down 40% to the lowest level in 33-years and things are only beginning to get rolling there. In New Zealand housing sales are down 53% year-over-year. And we all can see what is going on in the U.S.
i) the fact that housing construction is far in excess of household formation. CMHC data shows housing starts averaging 226,000 units per year from 2003 through 2007, 33% per year above the roughly 170,000 net new households formed each year [as estimated by TD Economics and others]. Based on housing permits and starts, this trend is expected to continue well into the future.
j) the fact that Canadian MLS housing inventory is at record highs while at the same time the number of sales is dropping dramatically [Canadian Real Estate Association (CREA)]
k) the fact consumer indebtedness is at record highs relative to disposable income [Vanier Institute. The Current State of Canadian Family Finances. 11-Feb-2008. p.28]
l) the fact that savings rates are close to nil even though the baby boomers should be saving for retirement [Vanier Institute. The Current State of Canadian Family Finances. 11-Feb-2008. p.9]
m) the fact that Canadian incomes have stagnated. Statistics Canada recently “reported recently that adjusted for inflation the earned income of the ‘average’ Canadian -- the so-called median income - was the same in 2004 as in 1982”
n) the fact that the economy is bordering on a recession. The high Canadian dollar has pounded exports and the U.S. , which absorbs some 70% of our exports, is likely in a recession. And what would happen if the rose comes off the construction and commodity bloom? Heresy I know, but both of these sectors are well above trend and are the only real source of strength in the Canadian economy.
o) the fact that inflationary pressures are building, raising the prospect of higher interest costs for borrowers.
I guess it is easier to put on our rose colour glasses, look in the rearview mirror and admire how pleasant the trip has been. Never mind the cliff dead ahead.
Posted by: Popper | May 19, 2008 at 11:50 AM
Banks/Real Estate agents are self-serving and biased and will continue to spin even as the market is sinking. Never believe them when commenting on the "market". Just look at the US. ScotiaBank's “soft landing” forcast for Canadian Real Estate sounds errily familar to the US forcasts in 2006:
Economists Predict Soft Landing For Housing
http://originatortimes.com/content/templates/standard.aspx?articleid=1828&zoneid=5
Posted by: Lie Detector | May 20, 2008 at 11:11 AM
Thanks alot John, Lie Detector and especially Popper - I think this information is really good.
For me - as a firt time buyer - even paying 150.000 could only land me a 1 bedroom condo in Scarborough - it's a joke!
I will wait for the bubble 's burst
Posted by: Arthur | September 29, 2008 at 04:03 PM