Toronto condos market: Has the roller coaster peaked? | Real Estate ...

Toronto?s sizzling condo market has peaked, and developers are just waiting to see where the roller coaster goes next, says a housing research firm.

?We have hit the peak in the new condo market, we are on the down side of the roller coaster,? Ben Myers, executive vice president of Urbanation Inc., said in a phone interview. ?We will really have to see how the developers react to a little bit of the slowing in the market, if they hold off on new launches.?

Canada?s biggest city is being transformed by a wave of new condos as low interest rates and a stable economy draw investors and individual buyers to downtown projects. Finance Minister Flaherty tightened mortgage lending rules in June and criticized ?continuous building, without restriction? of condos while the central bank says record consumer debt and the chance of a sudden housing correction are major risks to the economy.

On Tuesday data showed that the value of building permits fell less than expected as a gain in housing offset a steep decline in non-residential construction plans.

Permits dropped 2.5% in June, compared with a 3.6% fall expected by analysts, seasonally adjusted data by Statistics Canada showed on Tuesday.

Housing permits rose for the second straight month after four consecutive declines, advancing 4.2% following a revised 9.6% jump in May.

Permits for single-family units and for multiple-family units both rose in value by 4.2%. The central province of Ontario led the gains in both categories.

Non-residential permits fell 12.3% following a 3.6% increase in May, mainly because of weaker construction plans for government buildings in the Western province of British Columbia and for medical facilities in Alberta.

Although Canadian home prices hit a third straight record high in June, extending a steady climb that had triggered fears of a property bubble, a slowdown in the pace of price increases suggested the red-hot housing market is cooling.

I am hoping it doesn?t go all the way down to the bottom, I hope it?s a smooth landing

Record Projects

New downtown projects in Toronto include Cinema Tower by Daniels Corp. and Pemberton Group?s U Condominiums. There are a record 196 condo projects with 52,695 units under construction in Toronto, according to Urbanation, allowing investors who dominate the market for new units to become ?a little pickier on the projects they are holding out for? Myers said.

Howard Youhanan of Condoman Realty Inc., said some investors ?will never see a return? because ?the builders overpriced the units in the first place.?

Condo sales dropped 10% in July from a year earlier to 1,753 units and the average price fell 1% to $328,216, the city?s real estate board said Aug. 3. Prices have fallen 11% since February, according to Bloomberg calculations using Toronto Real Estate Board figures, and were little changed in July from a year earlier, ending annual price gains that peaked at 22% in October.

Housing research company Urbanation also reported Aug. 2 that new condo sales plunged 50% in the second quarter to 4,769, from a record high a year earlier while there were a record 18,123 unsold new units.

The increase in unsold condos has been moderated by a decline in the stockpile of low-rise units, suggesting there isn?t a problem with oversupply according to George Carras, president of RealNet Canada Inc., a real estate data seller. He said the 25,930 unsold homes in the first half of the year are close to the average since 2000, according to his company?s figures.

Mortgage Restrictions

Mortgage restrictions and provincial rules limiting Toronto land use may drive up prices by limiting the supply of new condos, he said. About half of condo projects that have pre-sold 70% of the units haven?t begun construction, he said.

?The tightening of credit is causing a restraint around the ability of traditionally-sold projects to move into construction,? Carras said. ?Tightening of credit could have the exact opposite outcomes to what they might be expecting.?

The tougher lending rules are the latest in a series of measures that have raised monthly payments for a typical first- time homebuyer by 25%, said Derek Holt, Scotiabank?s vice-president of economics in Toronto.

?The regulatory part of the picture will be an additional downside for housing markets to deal with for a long time yet,? Holt said. ?This is the market going through a correction that I think is needed to hopefully avoid what would have been an even worse outcome.?

Household Debt

The tighter mortgage rules came after Bank of Canada Governor Mark Carney said that record household debts posed the biggest domestic risk to the financial system. The ratio of household debt to disposable income reached about 154% in the first quarter, higher than the U.S. figure of 141%.

Carney has kept his key lending rate at 1% since September 2010, the longest pause since the 1950s, and in July cut his economic growth forecast citing global weakness and the weakest export recovery since World War II. The central bank?s July 18 forecast also said that housing investment will make no contribution to economic growth in 2013 or 2014 after signs of ?overbuilding?

?You don?t even need a collapse scenario in housing markets to keep the Bank of Canada on hold for some time yet,? said Holt, who last week pushed back his forecast for a rate increase until 2014 due to weak economic growth including housing demand.

?Industry Sentiment

The Real Property Association of Canada said Aug. 2 that an index of industry sentiment fell to the lowest level in three years in the third quarter because of concern about a slowing economy. The measure, compiled by FPL Advisory Group fell to 58 from 63 in the second quarter, with readings greater than 50 still suggesting ?positive trends.? The industry group says its members own more than $180 billion in real estate assets.

Toronto isn?t in the middle of a condominium bubble because record construction of new units is being matched by the demands of the city?s growth, Royal Bank of Canada economist Robert Hogue wrote in a report last month. He said that condo prices may fall by as much as 7% on a quarterly basis from their peak because of tighter regulations, increased supply of new units and decrease affordability. Flaherty in June lowered the longest mortgage amortization to 25 years from 30 years and capped debt payments at 39% of income.

Standard & Poor?s cut its outlook to negative from stable on seven Canadian banks July 27, including Toronto-based Royal Bank of Canada and Toronto-Dominion Bank, citing a prolonged increase in housing prices and consumer indebtedness.

?Policy Initiatives?

S&P, which said it might lower the ratings on Royal Bank of Canada and Toronto-Dominion one level, said it ?will continue to consider the impact of recent government and regulatory policy initiatives to curtail potential systemic risk arising from the housing sector as well as assess Canada?s relative performance vis-?-vis its global peers.? Royal Bank of Canada and Toronto-Dominion are rated AA- by S&P, the fourth-highest level.

Flaherty?s tightening may help the market because it ?codified what an affordable situation was,? said Jason Mercer, senior manager of market analysis for the Toronto Real Estate Board. Toronto homes in general still are well below the payment limits, suggesting there is more scope for price and sales gains, he said.

The average five-year mortgage rate was 5.24% last week, down from a peak of 7.54% in December 2007 and close to the lowest since the 1950s.

?New Units

There are still signs that buyers and sellers are keen for new units. The Ontario Place provincial park should be sold to housing that may include condos, according to a report written for the government by former Progressive Conservative leader John Tory, while Daniel Valencia Mizrachi says he has five clients who want to rent a condo and he can?t submit their offers fast enough to secure them a place to live.

?All the rental condos are rented in a few days, and normally above the asking prices. Now they are asking for one bedroom plus den? $1,900, which doesn?t make sense, and people are ready to pay that,? he said. ?The market will be safe for another two or three years, no problem.?

Myers at Urbanation said one the way he will know where the ?roller coaster? is going is whether developers start cutting prices on new units, which can rattle new homebuyers.

?That?s a sign that the market is really going south,? he said. ?I am hoping it doesn?t go all the way down to the bottom, I hope it?s a smooth landing.?

With files from Reuters

Bloomberg.com

Source: http://business.financialpost.com/2012/08/07/has-torontos-condo-roller-coaster-peaked/

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