The fevered pace of building in Toronto, Vancouver and Montreal is fuelling fears that the condo market is dangerously close to overheating.
A surge in condominium construction helped drive overall construction starts up 14 per cent last month to a seasonally adjusted annual rate of 244,900, the highest since September, 2007, and an increase from the March pace of 214,800, according to Canada Mortgage and Housing Corp. data released Tuesday.
Starts of multiple units, which include condominiums and apartments, climbed a sharp 27.4 per cent to 158,500, the second-highest monthly reading on record and a reflection of what Scotia Capital economist Derek Holt termed the “ongoing Canadian condo craze.”
Overall starts have now increased in seven of the past eight months, playing into concerns that the condo market is headed for a serious correction as developers continue to build. Canada now has the highest stock of unsold condos since the early 1990s, Mr. Holt said. A burst bubble would ripple through the economy.
The data put to rest “any doubts that Canada’s housing market, at least in certain sectors and cities, is at risk of overheating,” warned Bank of Montreal analyst Robert Kavcic.
The fear, particularly where downtown Toronto is concerned, is that the explosion of condo starts is outstripping the demographic trend.
“It’s starting to look like [condo construction]is running a bit ahead of household formation,” said Mr. Kavcic. “It seems the level of building is definitely in overheating territory relative to the underlying fundamentals.”
Building permits in Vancouver and Montreal have dipped, which could point to a slower pace of building, but Tuesday’s numbers still raised eyebrows.
Even Montreal developer Michael Dickey worries about Toronto and Vancouver, though not his city, which he sees as still playing catch-up with the others.
“I’d be worried if I was in Vancouver and Toronto,” he said.
“In Toronto, you’re getting an oversupply,” he said, adding that there is a danger the banks will start backing off on financing new deals.
Joe Vaccaro, president of Toronto’s Building Industry and Land Development Association, said the high construction rate simply reflects the breaking of ground on properties that were sold in 2010 and 2011.
“The statistics are a lagging indicator to those sales of previous years,” he said, adding that he’s confident Toronto can absorb new condos.
“Household formations are different today,” he said. “You’ve got baby boomers downsizing, born-again singles, young couples who want an affordable first home, and 100,000 new people coming into the [Greater Toronto Area]every year.”
Nancy Taza, a sales representative at a brokerage office in one of the CityPlace condo complexes in downtown Toronto, who has a direct stake in the market, also isn’t worried.
“Are there a lot of buildings going up? Yes. But, I really don’t worry about the market and my investments [three condos] because I see the demand every day and it’s so strong – especially in CityPlace where things are still developing and the area is growing.”
CMHC officials said on a conference call that they are monitoring the condo markets but also don’t see a problem at the moment.
Royal Bank of Canada chief executive officer Gordon Nixon said there are concerns about the condo market in Vancouver, but that they aren’t indicative of the housing situation across Canada.
He told a financial conference in Toronto hosted by Bloomberg that he’d “like to see the rhetoric [about a housing bubble]come down a little bit.”
Jim Ritchie, senior vice-president of sales and marketing at toronto condo developer Tridel, said few condo buyers in Toronto are from offshore.
Of 2,100 units Tridel has delivered in the past year, about 95 per cent were sold to local buyers, he said.
Many of those are investors, he told the same summit, and about 20 per cent of units are put up for resale as soon as they are complete.
Mr. Ritchie said that across Toronto, there were 173 projects under construction over all at the end of the first quarter, representing 48,000 units. Because builders are so risk averse, they will not start a project until it is at least 70 per cent sold, he said.
Most Tridel condos are in the $250,000-to-$500,000 range, he said, and the average age of a buyer is 33. One reason there are so many condos in the city is that the demographics of Toronto is ideal, with many singles or couples without children.
With files from reporter Tara Perkins in Toronto
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