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Condo buildings in the Leslieville area of Toronto, April 2013. (Deborah Baic/The Globe and Mail)
Condo buildings in the Leslieville area of Toronto, April 2013. (Deborah Baic/The Globe and Mail)

The economics of housing

Is Canada’s condo boom coming apart at the seams? Add to ...

Perhaps nothing is as emblematic of the Canadian housing boom of the past decade as the hundreds of high-rise condo towers currently under construction across the country. Indeed, the story of Canada’s decade-long explosion in housing is to a large degree the story of a construction boom in the condo sector. But that boom now appears to be coming apart at the seams leaving many wondering what’s in store for the condo markets in Canada’s largest cities.

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First, some context: Back in 2000, condos made up less than 20 per cent of all housing starts, and there were roughly 30,000 condos under construction at that time. But that was then. By the end of 2012, condos accounted for more than 40 per cent of all housing starts and there were nearly 130,000 apartment units under construction across Canada.

There are a number of reasons for this shift. Lack of land to build on in some urban centres is one obvious reason. Land-use policies favouring densification in some parts of the country have also forced development skywards. In addition, questionable policies from Canada Mortgage and Housing Corp., including providing insurance on some condo developer loans so they could secure cheaper financing, also contributed to the boom. Yet many market observers, including the Bank of Canada, are concerned that the pace of construction has gotten substantially ahead of itself.

There are now some major flashing red lights in Canada’s largest metros that would seem to justify this concern.

Toronto: 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.

Montreal: Although Toronto garners much of the focus when it comes to discussions of Canada’s condo markets, Montreal is actually where the greatest supply-demand imbalance currently exists. In fact, Montreal currently has twice as many condos for sale on the MLS as Toronto, and that number is growing rapidly. In March, the supply of condos for sale rose 25 per cent over last year (and 47 per cent over 2011 levels) to hit a record high while sales slumped 18 per cent.

Ottawa: Like Montreal, Ottawa’s condo market gets very little attention. In March, condo sales fell 8 per cent, but condo inventory rose 28 per cent over last year to hit an all-time high. Given the current supply-demand imbalance, it’s not surprising that the average resale price of condos in the city slumped 4 per cent relative to last year.

Vancouver: By now, everyone seems to realize that Vancouver’s housing market has been very weak. The condo market has certainly not been spared. In March, condo sales fell 25 per cent in Vancouver, but unlike in other major markets, inventory of condos was essentially flat relative to last year, although still near all-time highs for the month. The average resale price of condos in Vancouver fell 6 per cent relative to last year.

As an interesting side note, Vancouver condos have fared relatively well compared with other areas in BC. Consider Whistler, where the Real Estate Board of Greater Vancouver reports that condo prices have fallen 45 per cent over a five-year period.

It’s evident that the condo markets in Canada’s largest cities are in the midst of some sort of correction. That final chapter on this has not yet been written.

Here’s some advice. For investors, now that the condo party appears to be over, it’s worth wondering if anyone will be left with a hangover. If history is any guide, a hard landing in the condo market tends to hit those holding the financing on condo projects first and foremost.

Canada’s biggest banks have relatively little exposure to condo developer loans (less than 0.5 per cent of total loans). Canada’s smaller banks have significantly higher exposure, but still manageable (less than 2 per cent of total loans).

The real risk lies in some publicly-traded mortgage investment corporations that hold developer financing and especially in private syndications that provide financing to condo developers by raising money directly from the public through networks of mortgage brokers and financial planners. Should the current trends continue, these may prove to be spectacularly bad investments.

For potential first-time condo buyers, the supply-demand imbalance in Canada’s largest metros strongly suggests that there’s very little risk of prices rising meaningfully over the remainder of the year and into next. But the probability of price declines over that same time frame is high and rising. There’s perhaps never been a better time to sit on the sidelines and see how things shape up over the next year from the comfort of your rental condo.

Ben Rabidoux is a Canadian analyst and strategist with U.S.-based Hanson Advisors, as well as the author of The Economic Analyst blog.

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