Canadian Finance Minister Jim Flaherty is making progress in his effort to cool Toronto’s overheated condo market with tougher mortgage lending rules.
Condo sales dropped 10 percent in July from a year earlier to 1,753 units and the average price fell 1 percent to C$328,216 ($328,347), the city’s real estate board said Aug. 3. Prices have fallen by 2.3 percent from a year earlier, ending annual price gains that peaked at 11 percent in October, according to Bloomberg calculations using Toronto Real Estate Board figures.
“We have hit the peak in the new condo market, we are on the down side of the roller coaster,” Ben Myers, executive vice president of Urbanation Inc., said in a phone interview. “We will really have to see how the developers react to a little bit of the slowing in the market, if they hold off on new launches.”
Canada’s biggest city is being transformed by a wave of new condos as low interest rates and a stable economy draw investors and individual buyers to downtown projects. Finance Minister Flaherty tightened mortgage lending rules in June and criticized “continuous building, without restriction” of condos while the central bank says record consumer debt and the chance of a sudden housing correction are major risks to the economy.
New downtown projects in Toronto include Cinema Tower by Daniels Corp. and Pemberton Group’s U Condominiums. There are a record 196 condo projects with 52,695 units under construction in Toronto, according to Urbanation, allowing investors who dominate the market for new units to become “a little pickier on the projects they are holding out for” Myers said.
Howard Youhanan of Condoman Realty Inc., said some investors “will never see a return” because “the builders overpriced the units in the first place.”
Housing research company Urbanation also reported Aug. 2 that new condo sales plunged 50 percent in the second quarter to 4,769, from a record high a year earlier while there were a record 18,123 unsold new units.
The increase in unsold condos has been moderated by a decline in the stockpile of low-rise units, suggesting there isn’t a problem with oversupply according to George Carras, president of RealNet Canada Inc., a real estate data seller. He said the 25,930 unsold homes in the first half of the year are close to the average since 2000, according to his company’s figures.
Mortgage restrictions and provincial rules limiting Toronto land use may drive up prices by limiting the supply of new condos, he said. About half of condo projects that have pre-sold 70 percent of the units haven’t begun construction, he said.
“The tightening of credit is causing a restraint around the ability of traditionally-sold projects to move into construction,” Carras said. “Tightening of credit could have the exact opposite outcomes to what they might be expecting.”
The tougher lending rules are the latest in a series of measures that have raised monthly payments for a typical first-time homebuyer by 25 percent, said Derek Holt, Scotiabank’s vice-president of economics in Toronto.
“The regulatory part of the picture will be an additional downside for housing markets to deal with for a long time yet,” Holt said. “This is the market going through a correction that I think is needed to hopefully avoid what would have been an even worse outcome.”
The tighter mortgage rules came after Bank of Canada Governor Mark Carney said that record household debts posed the biggest domestic risk to the financial system. The ratio of household debt to disposable income reached about 154 percent in the first quarter, higher than the U.S. figure of 141 percent.
Carney has kept his key lending rate at 1 percent since September 2010, the longest pause since the 1950s, and in July cut his economic growth forecast citing global weakness and the weakest export recovery since World War II. The central bank’s July 18 forecast also said that housing investment will make no contribution to economic growth in 2013 or 2014 after signs of “overbuilding”
“You don’t even need a collapse scenario in housing markets to keep the Bank of Canada on hold for some time yet,” said Holt, who last week pushed back his forecast for a rate increase until 2014 due to weak economic growth including housing demand.
The Real Property Association of Canada said Aug. 2 that an index of industry sentiment fell to the lowest level in three years in the third quarter because of concern about a slowing economy. The measure, compiled by FPL Advisory Group fell to 58 from 63 in the second quarter, with readings greater than 50 still suggesting “positive trends.” The industry group says its members own more than C$180 billion in real estate assets.
Building permits meanwhile fell 2.5 percent in June as governments scaled back plans for new facilities in the western part of the country, Statistics Canada said today in Ottawa. Economists in a Bloomberg News survey forecast a decrease of 3.9 percent. The value of permits issued by municipalities fell to C$6.84 billion. Toronto recorded a 41 percent gain in building permits, including non-residential.
Toronto isn’t in the middle of a condominium bubble because record construction of new units is being matched by the demands of the city’s growth, Royal Bank of Canada economist Robert Hogue wrote in a report last month. He said that condo prices may fall by as much as 7 percent on a quarterly basis from their peak because of tighter regulations, increased supply of new units and decrease affordability. Flaherty in June lowered the longest mortgage amortization to 25 years from 30 years and capped debt payments at 39 percent of income.
Standard & Poor’s cut its outlook to negative from stable on seven Canadian banks July 27, including Toronto-based Royal Bank of Canada and Toronto-Dominion Bank, citing a prolonged increase in housing prices and consumer indebtedness.
S&P, which said it might lower the ratings on Royal Bank of Canada and Toronto-Dominion one level, said it “will continue to consider the impact of recent government and regulatory policy initiatives to curtail potential systemic risk arising from the housing sector as well as assess Canada’s relative performance vis-à-vis its global peers.” Royal Bank of Canada and Toronto-Dominion are rated AA- by S&P, the fourth-highest level.
Flaherty’s tightening may help the market because it “codified what an affordable situation was,” said Jason Mercer, senior manager of market analysis for the Toronto Real Estate Board. Toronto homes in general still are well below the payment limits, suggesting there is more scope for price and sales gains, he said.
The average five-year mortgage rate was 5.24 percent last week, down from a peak of 7.54 percent in December 2007 and close to the lowest since the 1950s.
There are still signs that buyers and sellers are keen for new units. The Ontario Place provincial park should be sold to housing that may include condos, according to a report written for the government by former Progressive Conservative leader John Tory, while Daniel Valencia Mizrachi says he has five clients who want to rent a condo and he can’t submit their offers fast enough to secure them a place to live.
“All the rental condos are rented in a few days, and normally above the asking prices. Now they are asking for one bedroom plus den-- $1,900, which doesn’t make sense, and people are ready to pay that,” he said. “The market will be safe for another two or three years, no problem.”
Myers at Urbanation said one the way he will know where the “roller coaster” is going is whether developers start cutting prices on new units, which can rattle new homebuyers.
“That’s a sign that the market is really going south,” he said. “I am hoping it doesn’t go all the way down to the bottom, I hope it’s a smooth landing.”