Ever since the federal government reduced the maximum amortization on insured mortgages in Canada back in July 2012 we have seen a 17% decline in sales. For home buyers it’s been tough to make sense of what’s really happening in the market because different segments of the market (price range, location, housing type) have been behaving quite differently.
To make things even worse, home buyers have to find some way of separating fact from fiction in the daily news stories they read about Toronto’s housing market.
One news story this week titled “Is Canada’s condo boom coming apart at the seams?” stood out for being very misleading and clearly there to alarm rather than educate readers.
In it the writer highlights “some major flashing red lights” with the condo boom in some of Canada’s largest cities. His key concerns and observations with Toronto’s condo market:
In March, active condo listings for sale on the MLS rose 8 per cent over last year to hit a record high for the month. At the same time, condo sales slumped 18 per cent. Compounding this growing supply-demand imbalance is the 55,000 new condo units currently under construction in the city, the majority of which are set to hit the market through the rest of the year and into 2014.
First of all, suggesting that 55,000 condo units are going to be completed over the next 20 months is nothing more than a bubble theorist’s wishful thinking. Yes, industry data does show that nearly 55,000 condos are scheduled for completion by 2014 and only 5,000 units in 2015 and a mere 1,000 units in 2016. But we all know that a condominium’s scheduled completion date is very different from their actual completion date. I have three clients who just took possession of a condo this month that was scheduled to be completed in 2011. Many of the projects scheduled for completion in 2014 are no doubt going to be delayed and their closings will be pushed out to 2015 and even 2016.
The other problem with suggesting that 55,000 condos are going to be completed in 20 months is that it is inconsistent with the historical volume of completions we’ve seen in the condo market. Over the past decade completions in the condominium market have run between 10,000 – 16,000 annually. Most people inside the condominium business seem to agree that Toronto does not have the resources to complete much more than 15,000 units per year.
But what about the growing supply-demand imbalance the writer highlighted? On the surface, hearing that condo sales are down 18% (they were actually down 20% in March) while the number of condos available for sale is up 8% might seem a bit alarming but if we dig a bit deeper we see a different story emerge.
If inventory is increasing it’s important to understand if this is driven purely by a drop in demand or is it being driven by a glut of new listings coming on the market. In the case of the March the number of new condo listings coming on the market last month actually dropped by 1.4%.
This tells us that the increase in inventory last month has nothing to do with a flood of new condos coming on the market but is being driven by a decline in demand.
Put another way, the 20% decline in condo sales in March 2013 meant that roughly 450 fewer people bought condos compared to the same month last year. As a result there were 450 more condos on the market at the end of the month which resulted in an 8% increase in inventory. This is hardly alarming. Similarly, if demand suddenly spiked next month we would expect that to cause inventory to fall. These kind of short term shifts between supply and demand are perfectly normal and are not a sign of an underlying supply-demand imbalance.
We always keep a close eye on the real estate market here at Realosophy but ever since the mortgage rules were changed in July 2012 we have been keeping an extra close eye on the market to help our clients make better decisions. In July 2012 the federal government reduced the maximum amortization on insured mortgages from 30 years to 25 years making it harder for first time buyers to get into the market.
Since the new mortgage rules were introduced in July we have seen a significant decline in demand from first time buyers in both the condo market and the freehold market. It’s important to remember that first time buyers are the segment most impacted by these changes because they are traditionally the buyers who are most dependent on CHMC insurance to buy a home.
Given that the majority of condo buyers are first time buyers, we are not surprised to see condo sales dropping at a faster rate than house sales over the past eight months.
We were encouraged to see the volume of new condo listings coming on the market over the past eight months actually drop by just over 2% when compared to the same months last year.
During our most recent review of the condo market we did not find a market coming apart at the seams. We found a condo market that has held up very well despite suffering a bit of a blow over the past eight months because of a mortgage rule change that is effectively a tax on condo ownership. Demand has remained strong and supply has not surged as many condo owners have opted to lease their condos rather than list them for sale. Condo leases were up 9% during the same period.
It’s definitely tough to separate fact from fiction when reading about Toronto’s real estate market. But I’m confident that anyone who invests the time to take a close look at Toronto’s condo market right now would leave that exercise feeling encouraged, not alarmed.
John Pasalis is the President and Broker of Realosophy
Realty Inc. Brokerage in Toronto. A leader in real estate analytics and
pro-consumer advice, Realosophy helps clients buy or sell a home the
right way. Email John
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