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Hey Toronto Condo Owner, why so Glum?

May 14, 2012 by Paul

Paul Johnston discusses the merits of purchasing low-rise or mid-rise homes in the city.

A friend of mine bought a condo unit in Toronto just about a year ago.

To says she’s concerned about all of the cranes cluttering up the skyline doesn’t begin to cover it.

I know she’s not the only one.

People who own real estate in this city are increasingly obsessed with the record amount of building going on in the condominium market. Housing start numbers released by Canada Mortgage and Housing Corp. this week blew past analysts’ forecasts.

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Many are conjecturing about whether the phenomenon will lead to too many units and not enough people to fill them.

If there is a downturn – and a landing hard or soft – people are wondering whether the damage can be contained to the condo market. Are four-bedroom houses in Leaside or townhouses in Leslieville subject to the same forces?

What about a two-bedroom condo in an older building near the subway line at Bloor and Islington?

Certainly people from federal Finance Minister Jim Flaherty down to the folks spinning the “stop” and “slow” signs in front of construction sites are wondering just how many condos one city can absorb.

Already we’re hearing tales about a cooling in the voracious demand for units in high-rise towers in the core.

At Toronto-Dominion Bank, economists are worried not just about the knock-on effect in the real estate market but about the risk to the entire country’s economy.

“We’re very concerned about over-valuation – particularly in the condo segment,” says Derek Burleton, TD’s deputy chief economist.

The bank estimates that national real estate prices are about 10 to 15 per cent too high.

But a correction won’t come about without a catalyst. The two most likely triggers are a sharp increase in unemployment or a sudden spike in interest rates and the economists say neither appears on the horizon in 2012 or 2013.

Mr. Burleton says there has been some decoupling between the condo segment and the rest of the market on the way up in recent years, so it’s reasonable to assume there would be a different pace on a downward slide as well.

The condo segment is more of a cyclical animal than the single-family portion, Mr. Burleton says, pointing to the run-up in the late 1980s and the downturn of the early 1990s.

He adds that the condo portion of the overall market accounts now for more than 50 per cent of sales activity so it carries a lot more heft than it did in years past.

But with so many turning their attention to the issue, can a hard landing be averted? Mr. Burleton believes it can.

He expects new construction to slow as the profits available to builders become less attractive with the rising cost of land. Also, the price run-up has not been as dramatic.

“We have not seen the same explosion of prices that we saw in the late 1980s,” he says.

One largely unknown factor is the extent to which foreign investors have been buying condos in Toronto. No hard data is collected and all of the stories are anecdotal, Mr. Burleton points out.

The economist says the condo market may suffer more than the market for single-family houses if a slowdown occurs, but over the medium term he thinks it’s more likely that prices for real estate will stay pretty steady with a bit of oscillation in the year-over-year comparisons.

Mr. Burleton cautions that forecasting the housing market is far from a pure science and that the eventual outcome in Toronto could range from no drop in prices at all to a 35-per-cent U.S.-style fall.

“One could argue to the decimal place but there are just too many uncertainties,” he says.

by Carolyn Ireland, Globe and Mail

See the full article at http://www.theglobeandmail.com/life/home-and-garden/real-estate/buying-and-selling/hey-toronto-condo-owner-why-so-glum/article2428705/