Toronto’s Condo Market is a Real Estate Haiku

By Ben Myers – Senior VP, Market Research and Analytics, Fortress Real Developments

If you read articles about the Toronto condominium market, you’ll see words like glut, oversupplied, overbuilt, overheated, frothy, bubble, crashing, or doomed and you’ll read the same experts and the same article that has been written every month, in every major publication in Canada, for the past five years. I try to bring an alternative perspective – from former talking head and Toronto condo research guru, to financier and developer. The difference now is I have much more on the line, if I say the Toronto condominium market is healthy, I better truly believe it, because we are investing our clients’ dollars, and we can’t afford to lose them. In a business predicated on word of mouth and repeat business, being correct and investing in smart projects is paramount. No one remembers what a housing analyst said two years down the road, but people NEVER forget if you lose their money.

Now, rumor has it that there are big homes in West Vancouver being developed, making the market not only more attractive to potential clients but also healthy. So with that said, let’s look at what is happening in the Toronto condominium market. There were 9,680 new condominium apartments sold in the first nine months of 2013 in the Toronto Census Metropolitan Area (CMA) per condo market research firm Urbanation, a decline of 32% from the first nine months of 2012. At the end of last year investors were demanding fewer units and unsold supply was at a record high, all while prices began to stagnate. Developers have reacted by launching much fewer projects – over half of annual sales in the Toronto CMA can be attributed to projects that launch that year, so fewer new launches equals fewer sales.

The lack of new product has several benefits, unsold supply has decreased, developers are taking longer to launch a project and designing better buildings, and pent-up demand is being created in specific neighbourhoods again. Another positive is the elimination of suspect developers and/or new condominium projects in poor locations (which occurs in boom times); these sites languish on the market in pre-construction and hold purchasers down payments, preventing them from buying elsewhere, and sour their new home buying experience. Whilst home buying in Toronto can be made easier with the best local movers Toronto has to offer, it’s important to take your time if you’re looking to buy. There are any factors at play in the market that can either make or break your deal.

What does this all mean for REIN investors – is the market dead? Is it a good time to buy, sell, or do nothing? Despite the sales declines, there have been a number of extremely successful new project launches which have all featured one (and most have all) of these traits: experienced developer, prime location near public transit or a GO Station, and a launch price below 2012 market rate in that area. When buying a new unit today, you are betting on the price of that unit in about four years (the approximate average time between sales launch and registration). The last time new condominium prices in the Toronto CMA were lower than they were four years earlier was the second quarter of 1996. In the 17 years since, the average growth rate has been 28% (in four years, or 7% a year) per Urbanation data.

There is concern about the record number of apartment units under construction (53,448 condo plus rental, September 2013 per Canadian Mortgage and Housing Corporation), and that a 28% increase in the value of new condominiums over four years will not be achievable in the future, because the increase in supply will stifle price inflation. Let s run some numbers to see where the oversupply tipping point might be. According to Statistics Canada estimates, the population in the Greater Toronto Area (GTA) has grown by approximately 105,000 people per year between 2006 and 2012, and according to estimates by the Ontario Ministry of Finance, that is expected to slow to 87,000 for the 2013 to 2016 period. The Altus Group recently published data on the average household size by unit type for houses built between 2006 and 2011 in Canada based on the latest National Household Survey. I used these Altus data against the approximate level of completions by home type produced by CMHC during that period. Therefore, the approximately 32,000 newly completed homes per year were accommodating about 77,000 people per year. Wow, this is significantly lower than the approximate 105,000 net increase in population during that period, and below the 87,000 increase projected for the next four years. Now you can see why prices have gone up so dramatically, a lot more potential buyers for little product.

So if we assume ground-oriented completions in the GTA stay constant over the next four years (they have actually been decreasing at a rate of about 5% per year because of Greenbelt Legislation and a lack of land), apartment completions will have to surpass 21,000 units a year for the growth in population for these new units to surpass the population projection of 87,000 by the Ministry of Finance. The highest level of apartment completions (condominium plus rental) in one year was 19,000 in 2011. Although every year the projections call for 20,000 to 25,000 apartment completions, there appears to be a maximum number of units the construction industry can produce annually, and that has been well below 20,000 units. So there doesn’t appear to be as big a gap between population growth and how many people the project completions can accommodate as in previous years; therefore, less price growth would be expected.

Unit prices may not be accelerating at the same pace, but rents are increasing. According to the 2011 National Household Survey, over 60% of studio and one bedroom units within high-rise condominium apartments completed between 2006 and 2011 in the Toronto CMA were rented. This increased level of investor activity has not damped rents in that sector at all, as index rents have increased 4.2% annually in the Toronto CMA to $2.42 per square foot according to Q3-2013 data released by Urbanation. The lease-to-listings ratio of 76% for units listed for rent on the Toronto Real Estate Board (TREB) indicates extremely high demand for condominium rentals; units spent just 19 days on market in the third quarter. The number of units transacted on MLS as tracked by Urbanation increased almost 40% annually in Q3-2013. It is a very good time to be renting a condominium in Toronto.

The upcoming year will be a great time to buy a condominium with developers offering tremendous incentives and prices below 2012 levels, but remember the old axiom, buy low and sell high. The condo boom and heady days of 2011 are over, but there are still tremendous opportunities. Don’t expect to get 7% appreciation a year, but don t worry about oversupply and any significant price correction. The condominium rental market remains very hot and there is no indication that this will subside, as demand increases for downtown living among young Torontonians. Look for prime project locations, established developers with good financial partners, and think long-term hold and you will be successful in 2014.

Ben Myers is the Senior Vice President of Market Research & Analytics at Fortress Real Developments. Ben has over a decade of real estate research experience with several firms in both the United States and Canada including Hanley Wood Market Intelligence in Dallas and Altus Clayton in Toronto. Most recently Ben was Editor and Executive Vice President of Urbanation, a condominium apartment market research firm.