Royal Bank of Canada published a report, much to the relief of Toronto Condo owners, that the current real estate market does not imply a bubble. I have always been of the opinion that newspapers and media outlets are in the business of selling their goods, so it should be expected that anything that is news worthy gets sensationalized to the extreme in order to improve readership and revenue. Record level sales of new condominium apartments raised concerns all the way to the top level policy makers in Canada with Finance Minister stepping in an implementing 4th change to the mortgage lending policy.
RBC very correctly states that all the condo sales and construction activity is less worrisome when considered within the broader housing context in GTA. In my opinion, everyone talks about the increase in condo construction and sales but no one talks about the decrease in single home category i.e. detached, semi-detached homes. The 'Toronto area new home sales - all categories' graph clearly shows that 2011 numbers were roughly around the 2003, 2004 and 2005 mark, much lower than the 2002 sales. Yet, no one was talking about a bubble back then (or may be they were, I just can't remember).
Single detached home construction has been on a downward trend in the past 10 years. The Ontario government's Growth Plan for the Golden Horseshoe, a.k.a. Places to Grow, aims at curbing urban sprawl by imposing intensification targets on municipalities. In a city like Toronto, the only place to go is up.
Population growth in the area, according to CMHC, is approximately 100,000 per year. New homes being completed each year may touch 25,000 units. So there you have it, the new construction in comparison with the population growth. All these newcomers have to live somewhere. That is why few newly built condos are sitting empty. As per RBC, unoccupied units represented 0.2% of the stock of multiple units in Toronto. The graph 'Newly completed and unoccupied units - multiples' shows that this percentage was at 1.2% in 1974; that is 600% higher than today's numbers. Was there a bubble back then?
CMHC reported last fall that only 10-15% of new condos are lsited for sale within 12 months of registration. That doesn't sound like a lot of "flippers". So, concerns about condo investors may be overblown. Further proof of this available through the rental vacancy rates, which came down even further last year to 1.1% despite an 18% increase in condo rental units. The other market that is flourishing is furnished short term rentals. I am in the process of partnering my clients and creating a pool of furnished condos for rental terms of 6 months or less. The experience came when I was searching for a short term rental for my client who had sold his house and was waiting for the new one to be completed. Everywhere I called, I was asked to sign up on the waiting list as nothing was available, especially in the downtown core. While there is always a risk, investors are right in expecting a strong rental demand in the years ahead. This is well supported by growth in the prime rental age group of 25 to 35 years in the Greater Toronto Area.
The Architectural Side: This is another point that is often overlooked. The typical construction time frame for a condo project is 3 to 4 years. So whatever construction you see being done today, not all of it is going to be ready all at once. It will be 1/3rd or 1/4th of the overall multi-unit construction projects that will become ready for occupancy in any given year. So you see, it is all spread out, typically over a 4 year period at any given point.
In addition, all the other factors still apply, such as population growth, immigration demographic, mortgage rates, job market trends and percentage of investors. For more information on how these, see my previous blog here. In conclusion, the heading of this post pretty much sums it up: No Bubble Trouble.
The following graph shows the amount of land that has been placed under the Greenbelt.