Bank of Canada warns on Toronto condo market
High level of unsold units in the pre-construction phase pose ‘elevated’ risk to economy
A high number of unsold units in Toronto’s condo market make the system vulnerable, the Bank of Canada warned Thursday.
The Bank of Canada is issuing among its starkest warnings to date about the country’s housing market, again taking special aim at Toronto’s condominium sector.
Bank of Canada warns of risk of ‘abrupt correction’ in Toronto condo market in 12-30 months
An overbuilt and overpriced condominium market is posing a risk to Canadian households, banks and the economy in general, the Bank of Canada warned Thursday in its latest review of the health of the country’s financial system.
The central bank particularly singles out the Toronto condo market, which it notes continues to carry a high level of unsold highrise units in the pre-construction or under construction phases.
The number of unsold units in Toronto’s high-rise projects in the pre-construction and construction phases hasn’t budged since December, the Bank of Canada said in a report released today. If those condo apartments are still without an owner when the buildings are completed 12 to 30 months from now, the BoC warned, “the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”
Dipping condo prices, the bank continue, could trigger a market-wide reaction, the BoC said in its semi-annual review of risks to Canada’s financial system: “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.” This, in turn, might threaten the ability of some borrowers to repay their loans, leading banks to tighten credit conditions. “This chain of events,” the bank concluded, “could then feed back into the housing market, causing the drop in house prices to overshoot.”
Overpriced Toronto condo market a risk to economy, says Bank of Canada
A plunge in house prices bites into net household worth, shatters confidence and consumer spending, impacting income and job creation.
The central bank says in its latest assessment of the health of Canada’s financial system that everything appears to be relatively sound at the moment but that levels of household debt and housing market imbalances pose an “elevated” level of risk to financial stability.
It warns that conditions could come tumbling down like a house of cards if any number of shocks — in Canada or the global economy — were to occur.
It singles out the Toronto condo market for special attention, saying there is a high number of unsold units in the pre-construction and under construction phases, making it particularly vulnerable to shifts in demand.
The bank says condominium prices could plunge if the supply is not absorbed as units come on stream over the next year to 30 months, which could spread to other segments of the housing market.
“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations,” it says in its semi-annual analysis. “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.”
Currently, risks to the financial system have lessened somewhat — given that borrowing costs remain at super-low levels — but the spillover effects from a sudden dip in the condo market could “weaken the credit quality of banks’ loan portfolios” and result in tighter lending conditions for households and businesses.
“This chain of events could then feed back into the housing market, causing the drop in house prices to overshoot,” the bank’s report said.
The central bank says it still expects the correction in housing to go smoothly, but warns that any number shocks could set the process going in the wrong direction, including a hike in interest rates, a downturn in the economy and even difficulties in Europe.
Last week, the OECD singled out Canada as one of three nations in the advanced economies with the most overvalued housing market, adding that despite that elevated status, prices continue to rise.
With files from CBC News
Speculators and home buyers alike are still upbeat … ?
Consumer confidence in Toronto’s condo market remains healthy: BMO survey
More boomers and echo kids hope to buy in GTA in next five yearsBy Susan Pigg
Consumer confidence in Toronto’s condo market appears to be rebounding, with an increasing number of potential buyers saying they intend to buy a unit in the next five years, according to a BMO survey.
Some 31 per cent of prospective buyers say they hope to buy a condo by 2018, up 11 percentage points from the last survey of buyer intentions done by the public opinion firm Pollara for Bank of Montreal.
Confidence has slipped considerably in Vancouver, however, where house sales, and prices, have cooled substantially since last July in the wake of tougher mortgage lending rules imposed by Ottawa.
The number of buyers planning to move into condos in the Greater Vancouver area over the next few years has dipped by five percentage points, to 28 per cent, down from 33 per cent last fall, notes BMO.
Here is why ?
Toronto Condos Finding Eager Demand … Among Renters
By David George-Cosh @ Reuters
There’s one group cheering the cooling in Toronto’s condo market: landlords.
Many potential buyers have opted to sit on the sidelines, given tougher mortgage rules and fears about the possibility of a hefty correction in the condo market. And that’s led to a surge in condo-rental activity in Canada’s largest city, according to Urbanation, a research consultancy.
It said condo leases rose by 31% in the first quarter compared with a year earlier. The average cost of renting a condo in Toronto was up 4.4% from last year to a record 1,856 Canadian dollars ($1,828) a month. That works out to C$2.33 a square foot, Urbanation said.
“Demand for renting condos has heated up with less first-time buyers. Rental transactions have exceeded resale volumes in the condo market since mid-2012, when the latest round of mortgage rule changes came into effect,” Shaun Hildebrand, the firm’s senior vice-president, said in a statement.
Sales of existing condos plummeted 17% in the first quarter from a year earlier, the Toronto Real Estate Board said earlier this month, though prices fell a much smaller 0.5%. New-condo activity was even harder hit, with Urbanation saying sales fell a whopping 55% in the period.
The number of condo units listed for rent, meanwhile, rose 19% from a year earlier, to 4,859 units. That was the second-highest quarterly total in the past four years, Urbanation said Tuesday.
“Investors are increasingly choosing to hold their units rather than flip them for sale. For the first time in a while, rents are rising faster than prices,” Mr. Hildebrand said.
Last week, CIBC economist Benjamin Tal said rental conditions in Toronto’s condo market may ease over the year as more units are completed by developers. He’s projecting that about 18,000 new units will be completed this year.