Toronto condo market to face ‘its ultimate test’

The fate of Toronto’s condo market has been a favourite conversation among Torontonians in recent years. Is it a bubble, or isn’t it?

A new report from CIBC calls Toronto’s condo market “reasonably balanced,” but one that “has not yet faced its ultimate test.”

That will come starting in 2014, which CIBC deputy chief economist Benjamin Tal calls “a turning point in the condo market.”

It’s when condo completions are expected to reach 35,000, which Tal calls “uncharted territory,” well surpassing the average 15,000 completions per year over the past 10 years.

That will put Toronto’s condo market in oversupply for the first time. Still, Tal said the impact on prices will depend on the reaction from both investors and developers.

“Overbuilding ... does not mean an inevitable crash,” said Tal, adding that it will spur a slowdown in supply, which has already started.

Earlier this week, Toronto research firm Urbanation Inc. said 2,728 new condos were sold in the first quarter of 2013, down 29 per cent from the fourth quarter of 2012 and a 55-per-cent drop from the first quarter of 2012 – which was a record for first quarter sales activity. The number of unsold units in active projects increased during the first quarter to 18,845 units, 21 per cent higher than a year ago.

“The lower volumes seen in the first quarter were not unexpected given how strong the market was throughout 2011 and the first part of 2012. The industry has been cautious in bringing new units to market as sales centre traffic has slowed,” said Shaun Hildebrand, Urbanation’s senior vice president.

CIBC is forecasting 23,000 condo completions in 2014, down from the projected 35,000, as financing concerns cause project delays. It estimates condo developers are currently facing a financing gap of between $2-to-3 billion, mainly with second-tier players and luxury condo developers.

While there is also a risk that highly leveraged condo investors will begin selling off their units – worried about losing money as vacancy rates rise and rental prices ease - Tal doesn’t see it.

“I suggest that the number of people to do that will not be significant to derail the market,” Tal said. “The majority of investors will be able to absorb the changing rental market conditions without being forced to sell.”

Tal said he expects Barrick Gold Corp. founder Peter Munk – who told The Globe and Mail he was making a contrarian bet on Toronto’s condo marker – will be one of a handful of investors getting into the market to make the same “calculated risk.”

Still, some economists have more dire predictions for Toronto's condo market.

In a report, Capital Economics Canadian Economist David Madani cites "anecdotal evidence" suggesting new project launches have "ground to a complete halt" in Toronto, "eerily similar to what occurred in the wake of the global economic slump and Canada's recession three years ago."

Madani said Toronto is "poised for a hard landing," due to a high level of unsold inventory.

"The eventual housing 'adjustment' is unlikely to prove painless," he said. "Moreover, Toronto's downturn could have ripple effects across the country, as banks generally pull back from financing the condo sector specifically."