The soft landing has landed for the Montreal condo market.
After years of condo boom times with rising prices and more and more construction, developers appear to be scaling back — and prices have dropped.
The National Bank’s House Price Index for condos shows a 4-per-cent drop in the six months ended January for the Montreal region.
But National Bank senior economist Marc Pinsonneault is not calling for a collapse, and like economists at Desjardins Economic Studies and the Canada Housing and Mortgage Corporation, sees flat prices or negligible gains in the next two years.
That fits with the Quebec Federation of Real Estate Boards assessment: a surplus of inventory in the resale market, high supply of new condos and less robust demand means the median price will stay flat and “the market will not become rebalanced in 2015,” according to Paul Cardinal, the board’s market analyst manager.
“Negative shock to the economy could have an impact, but at the moment it is not our scenario,” said Francis Cortellino, senior Quebec market analyst at the CMHC.
But the CMCH is forecasting this year or next, the number of completed, unabsorbed units will surpass the peak of 3,473 empty units reached in 2006. Unabsorbed units refer to those that are not sold; they may be rented, however.
At the end of 2014, there were 2,851 unabsorbed new condos in the Montreal Census Metropolitan Area, a figure that dropped slightly, to 2832, at the end of January 2015, Pinsonneault said.
A major condo surplus is putting downward pressure on prices, writes Desjardins senior economist Hélène Bégin, noting the seller/buyer ratio is 14 in the Montreal CMA, 20 in downtown Montreal. “This ratio is well above the equilibrium zone, which is between eight and 10.”
“Promoters have to manage reduction in the number of new vacant condos,” Pinsonneault said, a prescription echoed by all parties.
Here are the factors making it a buyer’s market for condos.
The number of unsold condos is increasing, with a 40-per-cent rise from 2013 to 2014, Cortellino said. Still, last year, there were nearly 11,000 condos under construction.
The CMHC indicates in 2014, only 69 per cent of new condos were absorbed at the time of completion: “You don’t have such percentages in Toronto, where it is well over 90 per cent,” Pinsonneault said.
In 2013, there was a slowdown in new condo starts to 8,805, compared with about 12,000 in the two preceding years — and economists believed this would continue, he said, but it was not the case: in 2014, that number increased to 10,516.
This was due to major projects in Montreal’s downtown, larger than expected, Pinsonneault said.
It seems promoters didn’t see they were building at a rate that exceeds demand, he said.
The National Bank 2015 forecast is for condo starts below 10,000 units, Pinsonneault said. And if they start new projects, promoters have to make sure they have a higher rate than the 69 per cent currently being absorbed.
Cortellino of the CMHC expects the condo starts to drop to 8,000 in 2015 in the Montreal census area.
The resale market has an effect on the new market, Cortellino said. If there is a lot of supply, potential buyers are more likely to find something they like and are less likely to go to the new condo market, he said.
When the resale is market tight, buyers are more likely to go to new construction.
The downtown glut
In 2015, there will be fewer large projects near the Bell Centre, where 1,500 to 2,00o units were recently added to the offer, although downtown construction will continue, Cortellino said. These projects are often very long from the pre-sale to the laying of foundations.
“Now, there is less demand,” he said. “Certain projects are delayed. So the construction starts will decrease.”
Outside of downtown Montreal, the market is adjusting more rapidly, he said.
The market moved in favour of buyers around the middle of 2011 to 2012, when sales dropped and new listings increased. It has been at least 2 1/2 years of oversupply, Pinsonneault said. At the beginning of 2011, it took an average of 80 days on the market for a condo to sell. In January of this year, the average was 120 days. This means active listings swell.
Last year, almost 3,000 condo units were completed and not absorbed. What this means to the builder is he needs to pay taxes and energy costs. For the consumer, there could be perks like appliances or even parking spots, according to Cortellino. And more builders will rent out those unsold condos.
In recent years, the biggest demographic of buyers has been under 35 years old, Cortellino said. But the growth of young households is slowing and mortgage and cash requirements have made it more difficult for financing.
And contrary to popular notions, the percentage of baby boomers buying suburban condos is larger than those buying downtown properties.
The flood of condos is also due to the shift to that type of dwelling as the preference of home buyers, Pinsonneault said. In 2000, perhaps 60 per cent of starts were single detached homes, 20 per cent condos. Now, condos are 60 per cent of starts. There has been a structural change in the real estate market in Montreal.
The rental vacancy rate for condos in the Montreal CMA is stable at 3.4 per cent. Every year, the rental condo market increases — last year with almost 4,000 new units — but the demand is there, so the vacancy rate remains stable, Cortellino explained.
The CMHC puts Montreal at moderate risk in its overall assessment of the Canadian housing market, released in November. Overheating is at low risk, acceleration of house prices is stable, over-evaluation is at high risk and it is watching the risk of overbuilding, which is increasing, Cortellino said. “The level of completed and unabsorbed units is close to average, but the level of units under construction relative to population is near a historical peak — inventories need to be managed,” the CMHC states.
So should you buy a condo?
It is obviously not the time to make a fast buck in the condo market, Pinsonneault said. But if you want a condo to live in, or you are a senior who wants to leave the suburbs, why not?