Last week I raised a couple of concerns about a recent Canada Mortgage and Housing Corporation (CMHC) report that had a positive forecast for Toronto's condominium market (see No Crash Expected for Toronto's Condo Market: CMHC). I invited CMHC's Senior GTA Market Analyst Jason Mercer to answer a few questions about this report and the overall outlook for Toronto's condo market.
John Pasalis: Hi Jason, Thank you for taking the time to do this interview. I wanted to focus today’s interview on CMHC’s recent forecast for Toronto’s condo market. My first question has to do with your forecast for continued price appreciation in the condo market through to 2009. The report appears to anticipate two negative factors working against the condo market: 1) an increase in supply from investors selling their units on completion and 2) a decrease in demand from first time buyers. How are these two negative factors going to impact condos in lower to mid price ranges? Does CMHC anticipate price appreciation in this segment of the condo market?
Jason Mercer, CMHC: Both of the factors you mention will result in increased choice in the existing home market for condominium apartments over the next two years. It is important to take a step back and think about what we experienced in 2007 to better explain what is forecast for 2008 and 2009.
In 2007, we experienced a resurgence in first-time buying activity in the GTA. This demand was based on strong job growth for young people coupled with the continuation of low borrowing costs and a diversity of mortgage products available to borrowers. Many first time buyers chose the condominium apartment market as their entry point into home ownership. As a result sales increased strongly in the existing home market. At the same time as sales were increasing in the resale market, completions of new condominium apartments had trended lower. This meant that there were fewer units that could potentially convert into new listings (listings from investors or from those whose housing needs had simply changed between pre-construction purchase and completion). Thus, with sales up and listings flat to lower, there was more competition for condominium apartments. We experienced average annual price increases in the central Toronto area of over ten per cent. In some cases we were experiencing multiple offer situations for some condominium apartments.
The situation will change somewhat in 2008 and 2009. With completions trending higher, we will see more listings in the market place. With more choice, offers will not be as aggressive, so price growth is expected to moderate to approximately five per cent in 2008 and 2.5 per cent in 2009.
At CMHC, we do not break down our condominium apartment price forecast down by sub-segment.
John Pasalis: The CMHC forecast appears to be based on the assumption that up to one third of condos under construction are owned by investors. Should the actual percentage of ownership by investors prove to be higher, do you feel that the condo market might experience a decrease in prices as a result?
Jason Mercer, CMHC: Any time you see an increase in choice in any segment of the housing market, you should expect to see a moderation in price growth. HOWEVER, a moderation in price growth does not necessarily translate into declining price levels. In relation to my answer to the first question, it is important to note that we experienced some of the tightest market conditions ever in the condominium apartment market in 2007. Add to this the fact that developer-held inventory at completion has been trending at or near historic lows, and it makes sense that we are not predicting price levels to drop, but instead slower price growth. There are varying opinions in the market place as to what percentage of condominium apartments under construction have been purchased by investors. Before registration this number is difficult to survey accurately. As stated in the latest CMHC Housing Market Outlook for the GTA, a one-third share of investors is a number that is commonly discussed among industry stakeholders. Obviously some projects may have an investor concentration above this level, and some below.
John Pasalis: Are there any differences in the outlook for condos in the city of Toronto compared to condos in the suburbs of the GTA?
Jason Mercer, CMHC: Currently at CMHC, we do not break down our housing market forecast by GTA sub-region. Historically, resale market conditions in the downtown Toronto area have been tighter than in surrounding areas. However, this could change over time. Many developments in nodes outside of downtown benefit from a growing array of local amenities, including proximity to public transportation, recreational opportunities, retail and employment opportunities. Many of these developments have also come to market with an average price per square foot below that found in downtown Toronto. Developments outside of the downtown core will remain popular.
John Pasalis: Are there any areas in the GTA (i.e., core vs. suburbs, etc.) where condos might fare better in the event of a downturn in the market?
Jason Mercer, CMHC: In line with my answer to the previous question, those developments that are proximal to a wide range of amenities within walking distance or with easy access to transportation options should remain popular.
John Pasalis: Are you concerned that Toronto’s condo market might be overbuilt with small entry level condos, especially considering that the next cohort of first-time buyers will be significantly smaller than the existing cohort?
Jason Mercer, CMHC: I believe we have seen a greater diversity of condominium product come on line over the past five to ten years. Many developments still cater to the first-time buyer, but we have also seen an increased number of developments pointed at the luxury end of the market, with per square foot pricing in excess of $1,000. A good number of these developments have sold very well. I would expect this trend to continue moving forward. As baby boomers move closer to retirement, many of these households may choose to modify their living arrangements.
John Pasalis: Is it still a good time to buy a pre-construction condo?
Jason Mercer, CHMC: This is not a question that can be answered with one broad statement. There will be more choice in the resale market over the next two years, which is forecast to result in slower new home sales. However, the new condominium apartment market remains very competitive. The finishings and amenities offered at developments offered over the past year have changed dramatically and are different from what is currently available in the resale market. We are still forecasting strong pre-construction high-rise sales over the next two years. In fact high-rise sales will account for half of total new home sales through the end of 2009.