Posted on October 18, 2011
Toronto’s condo boom about to bust: report
Christine Dobby Oct 18, 2011 – 9:06 AM ET | Last Updated: Oct 18, 2011 11:02 AM ET
The Toronto condo market appears to be overheating and could soon be flooded with excess supply, says a new report from Bank of America Merrill Lynch Global Research.
The market for condominiums in Canada’s biggest city could undergo a 15% correction and stagnant construction over the next several years, economists Ryan Bohren and Sheryl King said in the report.
“We think investors are underestimating the wall of inventory about to come on the market in the next 12-24 months which could dampen price appreciation and investor returns,” the authors said, noting that Toronto could follow the path set by a recent overbuild in British Columbia.
Anecdotal evidence suggests the vast majority — about 60% according to some estimates — of pre-construction sales in the city are to investors, the authors said.
“Although the motivation for investor pre-sale buying varies, they are likely getting a false signal from a very robust and tight resale market in Toronto,” Mr. Bohren and Ms. King said.
They noted that across the country, residential construction continues to “defy expectations of a soft landing” with last week’s housing starts for September coming in at a stronger than expected 206,000.
Multi-unit dwelling construction in particular has surged back to all-time peak levels, they said.
“Although this condo boom is generally seen nationwide, Toronto in particular has seen the strongest condo boom in over a decade with the number of condo units under construction at record levels,” Mr. Bohren and Ms. King said.
The natural household formation rate for Toronto is estimated at 30,000 to 35,000 annually and apartments historically represent about 35% of that or 12,000, the authors said.
“With apartment completions currently running at 18,000 and 37,000 condo units currently under construction, there is about 4.8 years’ worth of inventory in the pipeline,” they said.
Underestimation of the supply about to hit the market in the next year or two could put downward pressure on resale prices and rents, they said.
The authors suggested the housing boom in Kelowna, B.C. over the past decade could serve as a warning of what’s to come for Toronto’s condo market.
With a surge in demand from 2000 to 2008, units under construction in the B.C. city increased more than ninefold.
When housing demand collapsed during the 2008 recession, the construction pipeline continued to produce new units and inventories hit record levels, the authors said, noting that home prices remain about 15% below their 2008 peak in Kelowna.
“This may be an extreme example, but Toronto certainly looks like it is setting up for a similar down phase in the inventory cycle where prices stagnate or drop and construction activity plunges.”