Toronto, CANADA is Wary of Condo Correction
Toronto Wary of Condo Correction
By WALL STREET JOURNAL (AUG/30/2011)
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Bloomberg NewsBank of Canada Governor Mark Carney has warned that the "ample pipeline of developments…and heavy investor demand reinforces the possibility of an overshoot in the condo market" in Toronto and other cities like Vancouver. Above, condo construction projects stands in this photo taken with a tilt-shift lens in Toronto in July.
TORONTO—A condominium-building boom is lifting Canada's largest city into the same stratosphere as London, Sydney, Vancouver and Miami, but deepening the worries about a potential tumble.
Buyers snapped up 1,986 condominiums in Toronto in July, up 28% from a year earlier, according to the Canadian Real Estate Association. Average prices have surged 8% to 9% a year for the past five years, climbing to 304,000 Canadian dollars (US$306,900).
Rows of sparkling condo towers line the shores of Lake Ontario, while cranes dot the inland skyline near the tony neighborhood of Yorkville, a magnet for visiting pop-music and Hollywood celebrities. In May, a local real-estate developer announced that an undisclosed foreign buyer paid a record C$28 million for a sprawling unit in a tower of luxury condominiums anchored by a Four Seasons Hotel.
Juwan Howard, who plays for the Miami Heat of the National Basketball Association, recently toured the city by helicopter with Toronto-born teammate Jamaal Magloire, looking to buy a condo as a second home or investment.
"I've been hearing a lot about the Toronto market," Mr. Howard says. "I'm impressed by the fact that this market has been able to do so well despite what the U.S. market has done."
Toronto is a long way from Miami, but the condominium boom north of the border has begun to evoke ominous comparisons, even among real-estate agents. The Toronto area is home to 1,198 condo projects with 210,000 units, according to research firm Urbanation.
About 40,000 additional condominium units are under construction, including 16,000 set to hit the market next year. "There's more supply coming than the market really needs, unless we have a stronger economy than we have today," says independent housing economist Will Dunning.
In June, Bank of Canada Governor Mark Carney warned that the "ample pipeline of developments…and heavy investor demand reinforces the possibility of an overshoot in the condo market" in Toronto and other cities like Vancouver.
Toronto's condominium-sales volume and average sales price slipped 2% in July from June, the Canadian Real Estate Association said. Prices still are rising faster than rents, hurting buyers who lease their condos to renters rather than live in the units. If too many squeezed buyers decide to sell, even more supply would spill into the market.
Low interest rates and a resilient economy are boosting property values
throughout Canada. High commodities prices have
supported rises in some of Canada's oil and mining hubs, like Calgary
and Saskatoon. Real-estate prices are soaring in
Vancouver, propelled by non-Canadian, especially Chinese, buyers.
Last week, the Canadian real-estate trade group boosted its sales forecast for Canada's housing market.
Toronto has always had some of the steepest home prices in Canada, but the condominium boom is an eye-popping twist. Located about two hours by car from Buffalo, N.Y., Toronto still is dominated by neighborhoods of semiattached or stand-alone homes, much like cities in the Northeast.
About 60% of new-home sales in Toronto in the first half of 2011 came from condominiums, according to the Building Industry and Land Development Association. "It's a crowded skyline now," says Gary Wright, head of Toronto's planning division.
Sales in the past three- and six-month periods were higher than any previous period, according to consulting firm RealNet Canada Inc.
Toronto real-estate agent Hunter Milborne says many of his high-end clients come from India, Pakistan, the Middle East, Europe and China. Many foreign buyers pay cash, according to real-estate agents, allowing them to avoid the conservative lending restrictions at Canadian banks.
Under new rules imposed last year, investment buyers who want government-backed financing must make a 20% down payment.
Bloomberg News
About 60% of new-home sales in Toronto in the first half of 2011 came from condominiums.
As many as 60% of recent condominium buyers in Toronto are investors who bought their units from developers before construction began—and then sold their condos, Urbanation estimates. "A lot of people, in the last five years particularly, have made a lot of money just flipping condos," says Andrew La Fleur, a condominium broker with RE/MAX LLC.
But buyers whose condominiums are
investments are getting squeezed.
Stagnant rents make it harder to cover
mortgage
payments. And many economists expect Canada's interest rates to move
higher by the first half of 2012. Higher rates would
pressure some investors to sell and hurt demand from first-time condo
buyers.
"The longer we are in this superlow interest-rate environment, the
greater the potential for a big correction," Mr. La Fleur says.
Ramon Wu
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