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Condo prices in the Greater Toronto Area will likely fall by about 4 percent this year and a further 4 percent next year, Toronto-Dominion Bank economists predict in a new report.
The report takes an in-depth look at the housing market in Canada’s most populous city, and wades into the debate about just how much damage could be inflicted by the plethora of new condo towers that are sprouting up. It’s a debate that Finance Minister Jim Flaherty is keeping a close eye on, having expressed fears about the number of condos going up as far back as 2012, one of the key reasons why he tightened the mortgage insurance rules.
The report says that new condos are increasingly having trouble competing with older ones, which are generally larger and cheaper. This comes at a time when the high-rise segment is facing excess supply, as about 70,000 units will be completed during this year and next, 9,000 of which are still unsold. There are also fears that people who bought the condos as investments may be planning to sell them once the buildings are complete.
The new home market (as opposed to the market for resales of existing homes) accounts for almost one-quarter of home sales in the Greater Toronto Area, and sales in the new market have plummeted by about 30 percent from their peak in 2011, says the report, by TD economists Derek Burleton and Diana Petramala. During the same period resale activity has fallen only three percent.
“There are bound to be some knock-on effects of weaker condo activity to the single family home market, as it could impede potential move-up buyers from taking their next step,” the report says. “However, the strong fundamentals of the single detached home segment should keep it well supported going forward.”
The economists predict that neighbourhoods that have more detached houses should perform better going forward than those with a higher concentration of condo towers.
“Toronto’s skyline of cranes is now about to transform into a skyline of condo buildings,” the report says. “The number of new units scheduled to be completed in the GTA over the next two years is striking at a time when new condo sales are dwindling. Meanwhile, the market for single-detached homes remains drum tight, keeping average resale home price growth in the GTA near 9 percent year-over-year in February, further igniting fears of a bubble. One market is facing too much supply, while another appears to be heating up.”
The main source of data on Toronto’s existing home market is the Toronto Real Estate Board, which represents realtors in the city, while there are private companies such as RealNet Canada Inc. (which tracks the new home and condo market) and Urbanation Inc. (which tracks new condos) that release research on the new market. Because of that, reports such as this one by TD that look in depth at both markets are rare. RealNet Canada president George Carras has long been arguing that declining sales in the new home market stem more from a lack of supply than a lack of demand, with supply constraints stemming in part from government policies that are designed to contain urban sprawl.
TD’s report agrees that scarcity is a major issue when it comes to detached single family homes in the GTA.
“The existing home market is the overwhelming source for supply of detached houses,” Monday’s report says. “While 43,000 detached homes were sold in the resale market, only 9,900 were newly constructed in 2013, which compares to 22,000 in 2002. And even then, it has been slim pickings. The cost of a single detached family home ($718,000) is high – and largely out of reach for a family earning an average income in Toronto.”
RealNet’s Carras has been arguing that the abundance of new condos is, in large part, making up for the dearth of construction of detached houses.
“Given the high costs of land, recent changes in government land regulation and a lack of available infrastructure, builders have been incented to produce condos rather than detached homes,” TD says. “For every three condos built, only one detached home is constructed in the GTA.”
It notes that demand for new condos has been stronger in Toronto's downtown core, North York and near the waterfront than in areas on the outskirts of the city.
"The cost of carrying an average priced condo has been exceeding the rent that can be earned on it," the report says. "The combination of static demand and rising inventory of condos is likely to put downward pressure on prices over the next few years."