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Construction on a high rise condo building along Toronto's waterfront in 2012. (Moe Doiron/Moe Doiron/The Globe and Mail)
Construction on a high rise condo building along Toronto's waterfront in 2012. (Moe Doiron/Moe Doiron/The Globe and Mail)

The economics of housing

Five reasons not to buy a Toronto condo Add to ...

The Toronto condo market has been the centre of much discussion recently, with even the Bank of Canada giving it significant coverage in the December 2012 edition of the Financial Stability Review.

The potential risks facing this market segment have now crept to the forefront in discussions on the health of the overall Toronto real estate market - and for good reason. As the Bank of Canada noted, “Price corrections in particular segments of the housing market may put downward pressure on house prices more generally.” Because of this, the health of the condo market ought to be of interest to everyone in Toronto.

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And on that front, it appears that 2013 may prove to be a pivotal year for the condo market as a number of factors seem to be lining up against it.

In particular, I see five trends worth watching in 2013:

1) Sales of new and existing condos are weakening
Sales of existing condo units, as measured on the Multiple Listing Service, have fallen in both the 905 and 416 regions. January sales in the 416 declined 6 per cent from a year earlier and 9 per cent in the 905 over that same time period.

The story is even worse in the new condo market where as the attached chart shows, sales of new units fell 53 per cent in December compared to last year.

Falling sales have been accompanied by rising inventory through the second half of 2012. Rising supply and falling demand are destabilizing factors in a real estate market.

2) Inventory of unsold condos is now rising rapidly
January saw a significant rise in the MLS condo inventory across the Greater Toronto Area (GTA) over the same month last year, with condos for sale rising 28 per cent in the 416 — including a 42-per-cent jump in the downtown core — and 49 per cent in the 905. Weakening sales and rising inventory is a clear indication that supply and demand is increasingly out of balance.

3) There is an unprecedented supply of new condos in the pipeline, with a record number of units set to complete in 2013
Given the number of cranes that fill the Toronto skyline, it will likely come as no shock to Toronto residents that the number of condo units under construction is at an all-time high at just under 55,000 units. See the attached chart for a look at the historical comparison.

Of these, an estimated 25,000 to 28,000 units are set to complete in 2013, representing an enormous amount of potential new inventory. If current trends persist, these units will be completing, and a portion of them hitting the market, at a time when existing inventory is already high and sales are relatively weak.

4) Population growth is slowing
What’s ultimately needed to deal with what appears to be a potential condo oversupply problem is strong population growth in the GTA.

While we often hear that the GTA attracts some 100,000 new individuals annually, it appears that population growth is slowing. In fact, if we look at net population change in Ontario, we find that our population as a province is growing at the slowest pace since 2007. See the attached chart for details.

In a recent report, the Canada Mortgage and Housing Corporation discussed the effect of slowing population growth on real estate in Toronto:

“At least part of the reduction in ownership demand (in Toronto) over the second half of 2012 can be linked to weaker migratory flows into the region. Net migration for Ontario over the past year ending in September 2012 declined by more than 20 per cent as a decreased number of people from other countries came to live in the province and an increased number of Ontarians migrated out. This suggests that the GTA (which doesn’t have updated data for 2012 but represents roughly 70 per cent of the province’s migration flows), saw the number of net new people decline to below 60,000 for the first time since the late 1990s.”

Population trends are notoriously difficult to predict, but the fact that Toronto’s population growth is slowing dramatically as we head into 2013 is one more reason to be concerned.

5) Condo prices are now falling
Finally, and perhaps as a logical result of the weakness in the condo market in late 2012, prices are beginning to fall. The final chart attached shows the year-over-year change in the median resale price of condos and single-family homes in the GTA, as reported by the Toronto Real Estate Board. Put simply, when the trend is below zero per cent, it means prices are falling compared to the previous year.

Resale prices for condos are now slightly below what they were a year ago. Barring a major change in current sales and inventory trends, it doesn’t appear that prices will rebound soon, a topic I will address further in this upcoming seminar.

For prospective first-time buyers looking at jumping into the condo market, it certainly looks like 2013 will be a great year to sit on the sidelines and watch how this plays out. For condo owners looking to sell, be aware of the current state of the market and set your price and expectations accordingly.

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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