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Toronto condo builders still can't keep pace with demand

11/25/2016 | Posted in Toronto Real Estate by Michael Antczak | Back to Main Blog Page

Condos CN Tower

With Vancouver’s real estate market in retreat, industry pundits are wondering how long the Toronto market’s strength will perservere.

Tales from the downtown condo market still feature ferocious bullies and intense battles in the final quarter of 2016.

Real estate agent Manu Singh recently listed a condo unit in the popular King West neighbourhood for sale with an asking price of $334,900. The one-bedroom-plus-den was built in 1986 and had not been extensively renovated, so Mr. Singh was not anticipating a frenzy.

Still, the location at the intersection of King and Bathurst Streets was good, so he set a date to review offers for one week later. He was surprised when 18 parties immediately booked an appointment to see the unit.

Within 36 hours, it had sold for $358,000 to a bully. Two other pre-emptive offers fell short.

“It was pretty shocking,” Mr. Singh says.

Three other listings in King West and the financial district have gone the same way in the past few weeks. All four properties had bully offers and set record prices for the buildings, he adds.

“Forget about even waiting for the offer date,” he says.

Mr. Singh says everybody talks about the cranes in the downtown landscape, but new condo completions could not keep pace with demand in the first three quarters of the year.

In October, he points out, condo sales in Toronto jumped 22 per cent compared with October of last year. New listings dropped 13 per cent in the same period and the average price increased 9.6 per cent.

Those dynamics have encouraged purchases by both domestic and foreign investors, and young professionals who are tired of renting.

Many professional couples are doing well at work and they don’t want to be house-poor, he says, so they would rather buy a condo than a single-family dwelling.

He sees a lot of couples who purchase a condo now with an eye to moving up to a house eventually. Then they will keep the condo unit as an investment.

“They don’t want to rent for three to five years until they buy their $2-million house,” he says.

There’s a lack of supply in the rental market as well, Mr. Singh says, where tenants will go to “insane lengths” to secure condos for lease.

Almost every downtown unit is going to a tenant willing to offer more than the rent listed, he says. In some cases, renters will offer six to eight months’ rent upfront.

Landlords are happy because it reduces their risk that a tenant won’t pay, he says.

“It’s just a matter of good faith” on the part of the tenant, he says. “It’s a way to win.”

But all of this action also has many economists warning that a downturn may finally hit Toronto.

Mr. Singh says most of the people he deals with take a long-term view. Some lenders have raised rates on some of their mortgages recently, but rates are still extremely low, he points out.

“You want to make sure your investment is secure,” he says of the investor’s mindset. “Let’s not get caught up in small, market interest-rate adjustments.”

Toronto-Dominion Bank says it may not be until the new year that the full impact of the federal government’s new regulations aimed at cooling a frothy housing market are fully felt.

Low interest rates and the anticipation of the new rules coming into effect could be spurring on buyers in the near term, TD economist Diana Petramala says.

Ms. Petramala says Toronto and Vancouver are the most vulnerable markets to regulation changes and higher interest rates. She expects prices to fall 10 per cent in Vancouver and, while a relatively tight supply of listings will keep Toronto’s prices from falling, she says, she expects annual price growth to moderate to between 2 per cent and 4 per cent next year.

In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.

The more stringent “stress test” matters a lot to first-time buyers, who often have a hard time scraping up a down payment to begin with. The new rules surrounding insured mortgages with a fixed rate and terms of five years or longer may constrain the amount that buyers are allowed to borrow.

Jason Georgopoulos, a mortgage broker with Dominion Lendng Centres, says business has been disrupted because each lender has their own interpretation of the rules. Much of the complexity surrounded preapproved mortgages and whether they would be “grandfathered” once the rules came into effect on Oct. 17. After the changes were unveiled, several lenders changed their polices – and some more than once.

“It really hit everybody of out of the blue. They were left to scramble,” Mr. Georgopoulos says.

Woes in the Canadian economy – including a downturn in housing – may prompt the Bank of Canada to cut its benchmark interest rate to 0.25 per cent from 0.50 per cent early next year, forecasters at Capital Economics say.

Chief North America economist Paul Ashworth and senior Canada economist David Madani say the country’s economy has recovered from the temporary disruption caused by the wildfires in Fort McMurray, Alta. earlier this year. But the economists believe a downturn in British Columbia’s housing market is in full swing and they expect the malaise to spread.

They forecast that growth in gross domestic product will edge up by 1.2 per cent in 2017 to remain barely changed from an estimate of 1.1-per-cent growth in 2016.

A modest recovery in oil prices, they say, points to more spending on engineering and equipment in the energy industry.

Meanwhile, the Canadian economy has become even more reliant on the housing boom in the past couple of years, according to the economists. Housing investment now accounts for 7.7 per cent of GDP, which is a figure far above the long-term average.

So while a modest rebound in business investment is a positive sign for the economy, that improvement is likely to offset by a downturn in housing investment, they warn.

Vancouver housing sales have already collapsed, they point out.

“Most of the drop-back in housing investment will be due to a rapid drop-off in housing sales. This has already happened in Vancouver and, given tighter mortgage rules, Toronto won’t be too far behind,” they say.

Originally Posted in the Globe and Mail

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