Toronto condos have experienced a resurgence, as prices and sale numbers climbed in June. Now, the average condo will set Torontonians back more than $367,000, according to the Toronto Real Estate Board. As well, 6,000 condos have been sold in the city in the three months ending in June. In just one year, sales volume has increased 56 per cent. This debunks the sentiment of earlier reports that the condo market has been softening due to oversupply. So, what’s driving this growth?
Turns out, confident investors have contributed to the demand, despite warnings that prices are reaching bubble territory.
Cheap Money Drives Demand
Perhaps the most obvious growth driver is Canada’s ultra-low interest rate environment; even with the required 20 per cent down, investors can easily carry a rental property. In some cases, fixed rates are lower than 3 per cent. And they won’t be rising any time soon, according to Bank of Canada Governor Stephen Poloz, who stated last week that a rate spike could send “shockwaves through the economy”.
Poloz also reiterated Canada’s economy won’t get back to full capacity until 2016, hinting a rate rise won’t be possible until that occurs. This sends the signal, borrowing costs will remain low and real estate prices will climb higher.
Renters are Filling the Buyer Gap
Toronto rentals remain in high demand, in turn benefitting condo sales; investors are swooping in to buy lucrative units. However, the supply of rental purpose-built units is limited; only 1,500 – 2,000 such units are projected for completion in 2014, compared to 20,000 condo units.
This has pushed many renters to look for alternatives, and renting out condo units are a natural choice; in a recent report, CIBC economic Benjamin Tal estimated up to 50 per cent of the condo units under construction in Toronto will ultimately be rented out.
External Factors at Play
The Canada Mortgage and Housing Corporation (CMHC) is concerned condo prices are being driven by foreign investments that are highly speculative. In the coming days they will release their Condominium Owners Survey, which will look into foreign ownership in Canada’s condo market, focusing on big cities like Toronto and Vancouver. The report, which was compiled from a phone survey of 42,426 condo investors, is in reaction to a growing call from experts wishing for insight to investment within Canada’s condo market, paving the way for better policy making.
This was highlighted last year when CMHC Interim Chief Executive Officer Douglas Stewart said in a letter to Canada’s employment Minister Jason Kenney, “there is no comprehensive data source of foreign investors in the Canadian housing market,” adding “although some estimates can be gleaned from some municipal land registries, those estimates are not reliable.”
Foreign Investment: What are the Stakes?
Despite measures to control speculative buying, interest from outside Canada in Toronto real estate is growing. In my opinion, the rule that investors require 20 per cent down to own a second property is only driving Canadian investors out and allowing foreign investors with deeper pockets to snap up inventory created every year.
A CMHC roundtable on the subject in 2012 revealed 2 to 3 per cent of condos in the city are owned by individuals with no connection to Toronto. Also, tax forms reveal 15 per cent of the real estate overseen by property management firms is owned by foreigners.
Is the Market Overheating?
Some analysts say Toronto’s condo market is overvalued by as much as 20 per cent, and some experts claim prices could go higher still. Urbanation Inc., has been the leading source of information and analysis on the Toronto condominium market since 1981. Senior Vice President Shaun Hildebrand says “The new condo market has performed well above expectations in the first half of the year, reflecting a sharp rebound in buyer confidence, a number of highly attractive new openings and a variety of incentives for existing inventory.” He adds, “While sales have heated up, prices have remained in check due to competitive supply pressures and an absence of short-term speculation on the part of buyers.”
As with any investment venture, calculate the risk before jumping into condo ownership. After all, it was speculation that drove the U.S. market to its massive housing crash in 2008. While that doesn’t seem to be the case with Canadian real estate, it’s still wise to have a long-term investment horizon when considering real estate, rather than trying to flip a property for quick profit.