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Canada’s condo market headed for soft landing: report

Fin - Balance Sheet - CA
The Vancouver skyline from Stanley Park.

Canada’s condo market isn’t about to implode, at least not for the next couple of years, argues a new report that will put owners at ease but may frustrate those trying to decide when to buy.

The Conference Board of Canada condo report, released by mortgage insurer Genworth Canada, forecasts a “soft landing” in Toronto and a pickup in condo sales in Western Canadian cities such as Calgary, Edmonton and Vancouver.

"Although many commentators view the Canadian condominium market as an overvalued bubble about to burst, we think it is only slightly overheated and enjoys sound economic underpinnings," stated Robin Wiebe, senior economist at the Centre for Municipal Studies at The Conference Board of Canada.

The Conference Board points to Canada’s improving gross domestic product, which it predicts will pick up to 2.4 per cent this year and 2.6 per cent next year. That’s up from 2 per cent last year. Employment levels are also expected to rise 1.4 per cent this year and 1.8 in 2015, which should empower more Canadians to buy homes. More Canadians are choosing condos for their convenience and affordability.

The Conference Board acknowledges critics who say the housing market in Canada, in particularly the condo market in places such as Toronto and Vancouver, are poised for a crash. However, it takes a similar view as many other Canadian economists who say mortgage payments, not house prices, are what drive home buying.

The report follows a recent Conference Board report calling Canada’s housing market fears overblown, using the same mortgage payment versus house price argument.

Canadian economists have been lining up to fight back against reports outside the country saying we have one of the most overheated housing markets in the world. The Organization for Economic Co-operation and Development (OECD) believes Canada’s market is about 30 per cent overvalued when measured by affordability (price-to-income ratio) and 60 per cent based on profitability of owning a house (price-to-rent ratio). TD Bank has responded saying the market is about 10-per-cent overvalued, based on housing affordability measures, while economist Will Dunning suggests Canada’s housing market is actually undervalued.

Last year, CIBC said Toronto’s closely watched condo market would face its “ultimate test” in 2014, which is when the market was forecast to be in oversupply for the first time. But CIBC economist Benjamin Tal said overbuilding didn’t necessarily mean a market crash.

According to Urbanation, a firm that studies Toronto’s condo market, there were 58,659 condo apartment units under construction at the end of last year in the Toronto region, but it expects about 19,000 will be completed this year due to resource constraints, weather and other delays. A lower number would lessen concerns about overbuilding, that would drive prices lower.

“We recognize that it creates certain vulnerabilities for the market should demand unexpectedly fall,” Urbanation said in a recent report on its website. “However we also don’t believe it should be used as the main basis for projecting a decline in condo prices.”

TD Bank warned recently that Toronto’s condo market will see prices drop by an average of 4 per cent this year and next, blaming a drop in demand amid a continued building boom.

“The number of new units scheduled to be completed in the GTA over the next two years is striking at a time when new condo sales are dwindling,” TD says, noting that high-rise condo buildings have accounted for 60 per cent of supply of overall new homes in the GTA since 2011. That compares to 28 per cent in 2000.

The Conference Board expects condo sales in Toronto to be flat this year, but sees median prices ticking slightly higher, by 1.7 per cent, that’s above Vancouver at 1.5 per cent and well below Calgary at 3.3 per cent. For Toronto, that compares to average price growth of 7.8 per cent per year between 2009 and 2011, when sales were red hot.

Here’s a breakdown of the Conference Board finding by city:

Report Highlights, By City:*

Québec City: Prices forecast to grow 1.6 per cent in 2014 and 3.1 per cent in 2015. Sales are forecast to grow 4 per cent this year and 5.2 per cent next year. Why? Condo starts are expected to fall for the second straight year this year, lower inventories should bring builders back to the new market in 2015.

Montréal: Prices to increase 2 per cent in 2014 and 3.4 per cent in 2015. Sales are expected to rise 2 per cent this year and 2.5 per cent next year. Why? Job growth and a pullback in condo starts should balance inventories and boost starts in 2015.

Ottawa: Prices to increase 2 per cent in 2014 and 2.6 per cent in 2015. Sales are expected to rise 1.3 per cent this year, the first increase in four years, and 3.3 per cent next year. Why? Condo starts are forecast to fall significantly over the next two years as builders try to trim record inventories of completed but unoccupied units.

Toronto: Prices to increase 1.7 per cent in both 2014 and 2015. Sales are expected to remain flat this year and rise a modest 1 per cent next year. Why? Resale transactions are forecast to remain flat in 2014 then rise modestly. Starts fell more than 40 per cent last year, the Conference Board says, as builders faced higher inventories. It says starts should pick up again over the next two years.

Calgary: Prices to increase 3.2 per cent in 2014 and 3.4 per cent in 2015. Sales are expected to rise 2.9 per cent this year and 2.1 per cent next year Why? The energy sector continues to drive economic growth in this city. The Conference Board says “excellent affordability” will continue to drive demand for condo sales and starts, especially after a pullback last summer as a result of the floods.

Edmonton: Prices to increase 2.5 per cent in 2014 and 2.9 per cent in 2015. Sales are expected to rise 2.3 per cent this year and 2.6 per cent next year. Why? Similar energy sector drivers as Calgary. That said, condo starts are expected to drop this year after strong years in 2012 and 2013.

Vancouver: Prices to rise 1.5 per cent in 2014 and 2.6 per cent in 2015. Sales are expected to rise a modest 0.8 per cent this year and 2.8 per cent next year Why? Modest economic and job growth. The market is also expensive, which is a barrier to entry for many potential buyers.

Victoria: Prices to rise 3 per cent in 2014 and 4 per cent in 2015. Sales are expected to rise 2 per cent this year, and 1.1 per cent next year. Why? Weak job growth and high prices are curbing demand. Population growth and an improving economy should brighten the outlook.

*Prices are forecasted median price increases, according to the Conference Board of Canada