Condos in Toronto by Joe Howel
One of the most controversial topics concerning the real estate market, Toronto condos, is not only controversial but also quite complicated. Apparently, they’ve managed to scare not only people who’ve invested in them, but also quite a lot of bankers — even those from the Central Bank and Finance Minister Jim Flaherty. Although everyone is in hot debate over the situation, investors and building companies seem to have kept their cool, and continue to pronounce the situation overrated and safe for the moment. Let’s have a look at some of the qualified opinions from both sides.
Good Rumours vs. Bank of Canada Governor’s Scepticism
It looks like Ottawa’s efforts to cool off the boom of the Toronto condominium market has been successful — at least it was at the beginning of June. Prices on existing units have been softening, while some developers have abandoned or rewritten their plans for new condo projects, industry experts and insiders have stated according to The Globe and Mail. Also future buyers have become more aware of prices, which have risen by over 50 per cent since 2005.
These facts, however, have not been backed by any solid statistical data just yet, and frankly, we need good news as soon as possible. The current situation has been troubling not only on the regional but also on the national level. The fall of the Toronto real estate market would not only damage major real estate investors but also first-time buyers. Young buyers purchasing their first homes mainly consist of new families, who are one of the cornerstones of future prospects in our economy.
Waterfront condos by Loozrboy
On June 11th, economists at Toronto-Dominion Bank predicted a price correction of at least 15 per cent in the next two to three years for homes in both Toronto and another big market with similar problems, Vancouver. People seem to be scared, since Mr. Flaherty announced the overheating of the Toronto condominium market. Some building companies allegedly have problems getting financing from banks for their projects, since some of them are asking for up to 80 per cent of condos to be sold before they agree to finance the new project.
The lower loan rate is only one of the indicators signalling the rationing of the market. Benjamin Tal, deputy chief economist at CIBC World Markets, said:
This is not out in the market yet, but if you look in the high-end, namely condominiums that have been selling for more than $700 per square foot, we are seeing some gradual decline in prices there, and I think that will trickle down to lower-priced condominiums.
These softening measures might, however, result in scaring investors too much and eventually damaging the market. Although there is a lot that remains unanswered, the news about decreasing activity on the condominium market seems very promising.
It seems like Mr. Carney is not convinced by the alleged lower activity of developers and the cautiousness of new buyers. The governor and his officials are still concerned about the excessive building in Toronto’s condo sector. The analytical branch of the Central Bank suggested that if these overly produced units are not absorbed by demand over the next 18 to 36 months, the demand-supply imbalance might become a more pressing issue than ever. The situation might result in even worse outcomes over time. These might be serious financial shocks resulting in falling home prices and job losses. However, elevated prices in the real estate market are not the only problem to blame. The instability has also been caused by the high indebtedness of the household sector. The European problems are making it harder for the Central Bank to use interest rate hikes to tame borrowing and lending — despite their repeated warnings to Canadians that rates will have to eventually rise.
An Investor’s Point of View
A New Condo by Sam Xu
It seems like investors are quite certain that the condo boom is going to last a bit longer. Even those among the most conservative of investors are not panicking. John Andrew, director of executive seminars on corporate and investment real estate for Queen’s University, elaborated on this: “Most of their projects are going to be long complete before we ever have any kind of a crisis — if there is going to be a crisis.” Although low interest rates, the main reason for the boom, seem quite stable right now, and investors seem calm, building companies are being careful and have taken steps to minimize the impact of an eventual shift in the status quo.
Mr. Ritchie, senior vice-president of sales and marketing at Tridel Corp. and participant of a seminar on real estate investment sponsored by Queen’s University, claimed that there’s no real estate bubble. He pointed out that 7 to 8 per cent year-over-year increases are nothing when compared to the 1980s’ 20-to-40 per cent spikes. Canderel Group executive vice-president Ben Rogowski claims that there is absolutely no problem with the fact that many new condos are bought by investors, since they have no difficulty in renting them. This chain is working perfectly: deals are closed, and healthy deposits have been made.
Some companies try to introduce policies that would shut out the first-time buyers and thereby protect them from the risk of being dumped if interest rates go up. Tridel even introduced the 20 per cent deposit: in risky cases, the deposit can increase up to 35 per cent — just to have higher assurances that buyers will stay on the market. According to the Globe and Mail, Mr. Rogowski said he doesn’t know if the real estate market will suffer a drop in Toronto, but if it does, he believes the catalyst will be an external shock.
New Mortgage Rules: Are they Going to Help?
In response to the continuous construction of condos in large cities like Toronto, and the lack of any fall in prices despite a vast increase in supply, Finance Minister Jim Flaherty has decided to implement changes to the mortgage policy. The amortization period is reduced to the maximum of 25 years (from the original 30 years), the maximum amount of equity homeowners can take out of their homes in a refinancing is reduced to 80 per cent (previously 85 per cent), and the availability of insured mortgages is now limited to homes with a purchase price of less than $1 million. Also, the size of the loan shouldn’t be too great in comparison to the household income, the maximum gross ratio being fixed at 39 per cent and the maximum total debt service ratio at 44 per cent. These steps were met with considerable approval by multiple Canadian bank directors, praising its rationality and positive effect on the long-term stability of the Canadian real estate market.