The number of condo units under construction in Toronto has been sliding. But the trend is almost certainly temporary.
Bank of Montreal economist Robert Kavcic spotted the decline in Toronto condo starts and noted it in a research report Wednesday. He titled the report “Is the bulk of Toronto condo building behind us?” and added: “It certainly looks that way.”
If that’s the case, it would be welcome news to those economists and policy makers who have long been concerned that all of the cranes dotting Toronto’s skyline are a sign of overbuilding. Two years ago, former finance minister Jim Flaherty told The Globe and Mail’s editorial board that Toronto developers appeared to be willing to build new units until sales dried up, which could lead to a crash. He was concerned that buyers who entered the market just before the music stopped could get burned. “I do worry about the last person buying a condo in Toronto, and people getting caught,” he said at the time.
Toronto condo starts actually hit a four-and-a-half year low in the third quarter of 2014, with developers breaking ground on 16,500 units on an annualized basis, according to Mr. Kavcic. That compared to more than 40,000 units at the peak in the third quarter of 2012, he noted.
“There are still 56,000 units under construction in the city, so we could see a dose of supply hit the resale market in the year ahead, but that tally has begun to roll over, and it looks increasingly likely that any upward drift in mortgage rates over that period will be modest at best,” Mr. Kavcic wrote.
“Adding it all up, new starts in Toronto [including detached houses] now appear to be running below demographic demand at 25,800 in [the third quarter] (annualized), so any concerns about excess supply in the city (we’ve never really been on that bandwagon) could be balancing out as we speak,” he concluded.
Shaun Hildebrand, senior vice-president at Urbanation Inc., which tracks Toronto’s condo market, said there will be more shovels in the ground soon.
There’s typically a 12- to 18-month lag between presales of yet-to-be-built condos and starts, he said. Sales slumped through the first half of 2013, so new construction has fallen right on queue, he added in an e-mail. “This should be viewed as temporary, as we also know that new condo sales rebounded by 65 per cent in the first half of 2014.”
At the end of the second quarter there were 29,000 units in preconstruction that were collectively 66 per cent presold, Mr. Hildebrand said. Banks usually require developers to have presold 70 per cent of their units before they can receive their construction financing. Given that, “it won’t be long before starts rise again,” Mr. Hildebrand said.
He added that although likely temporary, this slowdown in starts was probably healthy because a large portion of new condos usually end up in the rental market, and the growth in the number of renters is moderating.
The number of condos that rented over the Multiple Listing Service in the Greater Toronto Area during the third quarter hit a record high and was 10 per cent above the same period a year earlier. But that was the slowest rate of growth in two years, according to Urbanation.
Normally, the third quarter is the highest period of the year for rental activity. Urbanation found that after seasonally adjusting the numbers, there was actually a 2.5-per-cent decline from the second quarter in the number of units rented over the MLS.
If rental demand has reached its peak for the time being, then a breather in the pace of new condo construction is doubly welcome.Report Typo/Error
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