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The Real Estate Market Sky-high Toronto condo numbers renew fears of overheated market

Fred Lum/Fred Lum/The Globe and Mail

Toronto's skyline, known for the towering cranes that drove Ottawa to tame home prices, will soon be dotted with several more.

Canada's biggest city already tops the list for the most high-rises and skyscrapers under construction in North America. It was also Toronto's frothy condominium market that helped push Finance Minister Jim Flaherty into his fourth round of mortgage restrictions almost a year ago.

Now, fresh numbers released Monday by Canada Mortgage and Housing Corp. showing a surge in construction suggest it's too early to shelve fears of overbuilding. That underscores Mr. Flaherty's comments just last week that he continues to worry about Toronto condos, and he's keeping a close eye on that market.

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The number of new Canadian homes on which construction began in May was much higher than projected, led by condos in Toronto, according to the CMHC data.

Developers say this stems from condos that were presold last year and the year before, and does not indicate a rebound.

Canadian housing starts climbed in May to an annual pace of 200,178, while economists had been expecting fewer than 180,000. The number of urban starts rose nearly 15 per cent, fuelled by a 22.2-per-cent jump in construction of homes with multiple units (such as condominiums), compared to a 3-per-cent increase in starts of single houses.

It has become increasingly difficult for economists to accurately forecast housing starts. Heading into 2012, they were generally certain the blistering pace of new construction would abate, but for most of the year, it did not. Toronto's condo market, especially, defied expectations, prompting many economists to boost their forecasts for this year.

George Carras, president of RealNet Canada Inc., which gathers and sells real-estate data, suggested that part of the problem is that the way the numbers are analyzed hasn't changed since condos came to be such an important force in the market.

Back when subdivisions of single-family homes were the driving element of the data, it was less volatile. A builder who planned to construct 300 homes in a community might do so five at a time, spacing starts over a long period, Mr. Carras said. "The data was a lot more smooth. Now, when it's a high-rise, you can't file for 10 of the 300 units, you file for all 300."

Mr. Carras is of the view that the swift pace of new condo construction in Toronto is simply making up for the decline in construction of single-family homes that is occurring in part because of government policies designed to restrict urban sprawl and promote downtown intensification.

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Other data released earlier this month showed that the value of building permits issued in April jumped 10.5 per cent on the back of a 51.9-per-cent surge in multiunit residential permits. That could imply even more condo construction down the road.

"Starts that are announced today are indicative of what happened a year or more ago," Jim Ritchie, a vice-president at developer Tridel, said of the condo market.

"What you're seeing now is the building permits and housing starts are related to projects that were conceived and marketed a few years ago, and are now being implemented," condo developer Steve Diamond added. "There is no question that the federal government's moves have resulted in a slowdown of new sales, particularly in the high-rise component. There has clearly been a down-scaling of the number of new high-rise projects that are now being marketed."

Economists still expect housing starts to level off this year.

"We do not believe that May's jump in housing starts in Canada is the start of a trend," said Marc Pinsonneault, an economist at National Bank of Canada, who noted that most of the increase came from condos in Ontario, with a full three-quarters of it occurring in the Greater Toronto Area.

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