Since this release about the Condo market in Vancouver and Toronto came out today from a banking conference, I had a few clients approach me about it. I am a REALTOR® in the Greater Toronto Area and felt compelled to write this blog about the situation, at least as it pertains to Toronto.
While I am no financial analyst, I do however understand the real estate market. Anyone who can read between the lines can see that there is nothing meaningful in any piece of news that is based on the comments coming out of this banking conference. Let’s analyse a few comments:
“Gordon Nixon, president and CEO at Royal Bank told a banking conference Tuesday that the Canadian housing market could be headed for a slowdown, led by Vancouver and Toronto”. "When you look at markets like Vancouver and Toronto there is a level of caution from a risk perspective that is higher today than it would have been a couple of years ago," he said.
What does the last paragraph really mean? There are words and phrases like ‘could be’, ‘slow down’, ‘level of caution’, ‘risk perspective that is higher than it would be a couple of years ago”. Does all of this substantiate anything other than trying to convey uncertainty and risk in the market? Uncertainty and risk are part of any market. In fact they are part of life. They always have been and they always will be.
Before I go on and present the flip side of all this, let’s look at some other comments.
“The new numbers from Canada Mortgage and Housing Corp. showed an annualized 200,200 unit starts for December, besting analyst expectations and up 8% from an upwardly revised 185,600 units in November. Economists surveyed by Bloomberg had predicted 185,500 units for December.” That’s an overage of 14,700 for the month of December. Will that really result in that much of an oversupply?
“Overall in 2011, construction began on 106,700 units in condominiums or multi-unit buildings, up 17% from a year before, while starts of detached homes dropped about 12% to 66,800. The spread between single- and multi-unit starts is the widest since 1990”, said Robert Kavcic, an economist with BMO Capital Markets. I say that the spread is widest because the availability of land has dropped dramatically since 1990. So now less detached homes are being built and more high rises are being built. The growth is vertical and not horizontal.
So now, let’s look at the flip side.
First, consider some quotes from that very banking conference that is being used to portray a doom and gloom scenario:
- Interest rates are not expected to increase in the coming year.
- The US financial catastrophe south of the border actually created opportunities for Canadian banks looking to expand their U.S. presence as it wiped out competition for banks like TD, said its CEO, Ed Clark.
- Nixon said he is seeing a slowdown in consumer borrowing.
- The picture for the overall new-construction market is also relatively stable, up only 0.9% in 2011.
Secondly, my comments:
Would the building industry not be watching the trends and adjusting their project starts according to the market? They are the ones with the larger investment. In my opinion, the builder community in Toronto has been very responsible in analysing and adjusting to the market. They have to maintain the price levels and ensure that they continue to stay profitable and in business.
Investors in Condos versus Rental Market Vacancy Rates
While the condo market largely remains occupied by end users who are treating condos as their long term primary residences and raising families, there are a certain percentage of investors as well. Here is copied text directly from City of Toronto website. It conveys the reality of the investor market from a rental perspective: Rental vacancy rates have been in the moderate range for the last 4 years (3.3 per cent to 4.3 per cent), but they have been declining for the last two years. For the previous 30 years, vacancy rates were persistently low, often below 1 per cent. (http://www.toronto.ca/planning/housing.htm).
The components of rental market have historically been split between “institutional rentals” and private rentals. 55% of the Primary Rental Market is private rentals. These are the individual condo owners who have bought the units for investments and rent them out to tenants. All this means that we do not have a large number of units sitting unoccupied. Rents are on the rise and investors are seeing good returns in the market.
Population: A big factor
Canadian population has increased by over 7 million people since 1990 (27,296,859 in 1991 to 34,532,200 in 2011). If were to assume medium grown, according to StatsCan, we are projected to grow to almost 36.5 million by 1 July 2016. That’s an addition of almost 2 million Canadians from 2011 to mid-2016. These people will need to live somewhere. Population in Toronto (Metropolitan area of Toronto only and not Greater Toronto Area) has grown by an average 100,000 each year since 2007. (http://www40.statcan.gc.ca/l01/cst01/demo05a-eng.htm). Almost 400,000 people have been added to the area from 2007 to 2010, if you add the increases in surrounding cities of Peterborough, Oshawa, Hamilton, St. Catharines-Niagara, Kitchener-Cambridge-Waterloo, Brantford, Guelph, London and Barrie.
To put this population growth in perspective, the Canadian baby boom defined from 1947 to 1966, saw more than 400,000 babies born. In other words, we have seen the same growth in little over 3 years just in Southern Ontario that the Canadian baby boom gave us over 19 years in the entire country.
Immigration Demographic: Toronto, Montréal and Vancouver are home to nearly two-thirds of Canada's foreign-born population. Vast majority of immigrants chose city life and as time goes on, this will only snowball into larger concentrations being drawn towards Toronto, Montréal and Vancouver. (http://www12.statcan.ca/census-recensement/2006/as-sa/97-557/p15-eng.cfm) The reason for this is that new comers tend to stay where they know the most amount of people or have relatives. Since there is already a large concentration of immigrants in these cities, these cities will continue to draw and retain more and more immigrants.
Furthermore, the immigrant demographic has changed. Gone are the days when immigrants used to come, work for minimum wage and live in basement apartments. Today’s immigrants come with money, buy houses and businesses as soon as they arrive. This is evident from major banks coming out with lending programs geared specifically towards newcomers to Canada. A few of my clients are recent immigrants who have invested in real estate and made excellent returns.
Mortgage Rates and Lending Market in General: Need I say more in this section other than that the mortgage rates are on an all time low and are forecasted to remain like that for some time to come. The federal government has tightened the mortgage lending rates significantly. A buyer may choose to get a variable rate but must qualify on a much higher rate. There is no `zero down’ lending. Down payment requirements for investors are high; 20% and 25% in some new developments. Anyone who can afford to invest in a condo with 20% plus of the purchase price as down payment isn’t exactly a high risk investor.
Job Market Trends: In the Toronto economic region, employment increased by 24,300 from September 2010 to September 2011. All job gains were in full-time employment. The number of unemployed people fell by 51,600, causing the unemployment rate to decline from 10.1% in September 2010 to 8.6% in September 2011. Over the same period, the provincial unemployment rate declined from 9.2% to 8.0%. (http://www.servicecanada.gc.ca/eng/on/offices/2011lmb/gtr.shtml)
So there you have it. Slice the information as you may, the numbers don’t lie. However it remains that one must use common sense when buying anything, let alone probably the single largest investment for most people, which is real estate. Don’t over-invest. Don’t take on more debt that you can afford to. My advice is best summarized by my marketing tag line: Think, Analyse, Grow. Consult with a professional REALTOR® and be certain that you get the right advice.