Condo Market is "Overheated" - Will Dunning

Shocking, just shocking . . . . there was overbuilding? Bob Rennie and Cameron Muir never told me that. This article points out the massive overbuilding in Toronto but Vancouver's overbuiding, on a per capita basis, is significantly larger. See this post.

From Tony Wong - Torstar News Service
A prominent Toronto housing economist is warning of an impending chill in the city's overheated condominium market. The record number of units set for completion in 2009 and beyond will drive down housing prices and cause vacancy rates to go up as some condos sit empty.

By the end of September, there were 33,919 condos under construction in the Toronto metropolitan area – more than three times the city's annual average – said economist Will Dunning in a report on the rental and condo markets." This very large pending inventory is setting the stage for a substantial correction," Dunning said in an interview yesterday. There are currently 26,000+ housing units under construction in the Vancouver area.

The warning comes on the heels of figures yesterday showing sales of existing homes in Canada continued to slide in the year's fourth quarter. Declines were steep amid the lowest level of monthly activity in almost eight years as investors worry about the faltering Canadian economy." In the short term, condos are the most vulnerable aspect of the market," said CIBC World Markets senior economist Benjamin Tal. "I think there is a lot of oversupply, especially in cities such as Toronto and Vancouver." Vancouver, we are the best place on earth for something, especially if that something is thinking that we are the best place on earth . . . or perhaps condo speculation.

Already, some prominent developers have warned some condo projects being marketed may not make it to completion. In a tight credit market, as falling sales hit the new home market, speculators and investors take cover.Toronto condominium starts are normally in the 10,000 to 12,000 range annually, but a bottleneck in construction from record sales in prior years has a significant number of units still to be completed, Dunning said. Many of those units were bought by finicky investors who are quick to exit the market if they don't get the returns they expected. Flippers were once the desired consumer for condo projects and now they are the bane of many projects.

Analysts say 30 per cent to 50 per cent of sales in certain buildings were to such investors, with some already set to exit the market. As a result, the number of condos listed for sale in central Toronto is already up a stunning 75 per cent in November from those on sale a year earlier, according to Dunning." It appears that this process – excess supply in the condo sector and owners acting to sell the units – may be underway already." The large supply of condos will affect the apartment rental market, Dunning said, as units now under construction become available for occupancy; in effect, " With the weaker economy, the supply will exceed the need." Yes, it looks like rental vacancy and rates are headed in a favourable direction for renters.

The Canada Mortgage and Housing Corporation reported last week the vacancy rate in the Toronto area fell sharply to 2 per cent from 3.2 per cent a year earlier, but Dunning said the supply of new condos in the coming year will keep rates from dropping further, and will likely cause vacancy rates to rise. So far there haven't been any catastrophic failures in the Toronto area, although one key project, MintoUrban Communities Inc.'s 300-unit Minto King West site, is on hold because of slow sales. The developer is expected to break the project into two smaller buildings. First-time buyer Janet Chang, 26, said she decided to hold off on buying a condo in downtown Toronto this year because of the uncertain economy." It's tough having to live with your parents for another year, but the last thing you want to is to lose your equity in a condo," said Chang, an accountant.

Before the advent of the economic meltdown in the United States at the beginning of the fourth quarter, new condo prices in the Toronto area were holding up well. Prices for new condos in the third quarter were up by 2.5 per cent over the prior quarter, or about $406 per square foot, according to market research firm Urbanation. Since then, many developers have slashed prices off their suites and added incentives such as free televisions and even a new car over the past few months. In 2006 the average condo price in Toronto was $239,816. Toronto has 'overpriced' condos but Vancouver has super-duper-touched-by-Bob-Rennie-exceptionally-overpriced-condos.

Meanwhile, there was more dismal news for the national real estate market as seasonally adjusted sales for November numbered 27,743 units, according to figures released by the Canadian Real Estate Association. Sales were down 12.3 per cent on a seasonally adjusted month over month basis, and a far steeper 42 per cent unadjusted compared with November 2007.The national average price of a home was down 9.8 per cent to $280,880, or more than $30,000 less than a year ago." The report underscores that the Canadian housing correction continued in earnest," said Millan Mulraine, economics strategist for TD Securities. British Columbia, Alberta and Ontario were the three provinces reflecting the greatest decreases, said the realtor association."

National sales activity and price trends will continue reflecting increased cautiousness on the part of lenders and buyers as the economy works its way through and out of the recession," said the real estate association's chief economist Gregory Klump. In cities such as Toronto, sales of existing homes plunged by 50 per cent in November, the biggest decline since April 1989 when sales dropped to 54 per cent. Gregory, you forgot to mention that prices in Toronto dropped 30% the last time that this type of sales drop happened.