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Canada’s red hot condo market could spell doom for sellers

Looking to sell your condo? Good luck. A potential glut in multi-unit dwellings may mean a soft resale market in the very near future.

Construction of condominiums and apartments continues at a furious clip -- most notably in Ontario and the Prairies -- according to the latest report on national housing starts from the Canada Mortgage and Housing Corporation (CMHC).

Multiple unit starts in Toronto alone shot up 50.4 per cent in March, while the number of existing condos left unsold also rose sharply.

How will a sharp rise in inventory affect those already in the market? Gregory Klump, chief economist at the Canadian Real Estate Association, doesn't believe the recent uptick will mean much of a drag on resale values.

"Condo starts in Toronto were a big factor supporting starts nationally. The limited supply of single-family homes for sale is supporting condo apartment construction in Toronto; however, the jump in starts for March may ultimately be attributed to warmer weather," he explains. "Later in the year, we'll have to look back to see if it's just a case of March borrowing some starts that would have otherwise been counted in April."

That said, condo apartment prices in general (and prices for other types of housing too), are up from one year ago, but gains have been getting smaller, Klump adds.

The cost of owning a home in Canada does continue to climb and with respect to the boom and bust nature of the condo market, Toronto now reportedly stands as the epicenter for a Canadian housing bubble.

In fact, Canada's biggest banks are reportedly tightening lending standards for condo builders and imposing demands on developers -- such as insisting they raise their equity into new projects and to produce a higher percentage of pre-sold units with significant deposits from customers.

Although many use monthly housing starts as an indication of the 'health' of a real estate market, it must always be analyzed in context, explains Don R. Campbell, a real estate researcher, author, and president of the Real Estate Investment Network.

"Weather and supply play major roles in these numbers, however, even bigger fluctuations are driven by the type of properties being started," he says. "For instance, large condo projects and building permits issued months ago get started in the spring, often times skewing the trend line."

Because national numbers and averages truly don't mean a thing on the 'street level' in specific cities and towns, Campbell says, it is important for people using the CMHC's data to 'peel the onion' further to analyze:

  • What cities are witnessing the starts?

  • What types of housing starts have begun in that city?

  • Is there population and job growth in the region strong enough to absorb those starts?

By looking at these three factors, one can determine, a little more accurately, whether an oversupply (keeping caps on values) or undersupply (putting upward pressure on values) situation will occur over the coming 12 months.

Mathieu Laberge, chief economist, CMHC in Ottawa, says multiple starts (read: condominiums and apartments) may have driven the March increase in terms of overall housing starts but it's too early to know if it'll continue.

"Overall multiples went up eight per cent to 124,100 units and that contributed to the increase of single moderated (homes)," he says. "Most of that increase came in Ontario and the Prairies but that was offset by the decrease in B.C. and Quebec. It's too early to make a call on whether or not this will continue in future starts to see if it's a trend or not."

Pay attention to your region

The path of growth for housing starts in each region is varied, the CMHC report shows. Laberge says potential homebuyers need to zero in on their own specific region to understand what's unfolding.

"Housing markets are local," he says. "If people want to buy a house, they need to know their market and where it's at, what are the determinants and what is the economy for that local market. That helps to assess the overall market for their city."

Rising home prices increase demand for more affordable alternatives, like condos, the CREA's Klump says. As single-family homes in Toronto are in short supply relative to demand, the price of a single-family home in that city is out of reach for many buyers.

"Toronto is seeing homebuyer demand for more affordable alternatives, which is being filled by condo apartment units," he says. "If most of the increase in housing starts was weather-related, then the latest figures from CMHC really aren't telling us anything we didn't already know."

That's a plus for those looking to sell. That said, in places where demand for condos is rising, supply is also responding.

"That's why we're seeing multiple unit buildings making up a larger share of overall housing starts. But for individuals, aggregate figures don't matter," Klump remarks. "Supply and demand conditions can and do vary widely depending on where you are trying to sell."

Looking to sell? Do your homework

If a homeowner is considering a condo as their home and they're looking to sell, it is important for them to do their research, Campbell advises. Not all condo buildings and management are the same and not all markets across the country are the same.

"In today's market conditions, they should be planning to hold on to it for at least five years and to understand that the market will be fluctuating over the next three to four years," he warns. "So choose well and do not get caught up in a bidding frenzy."

In order to sell condos, especially when supply starts to creep up in 2012, marketing is going to be the key. Just sticking it on MLS and hoping for the best may have worked last year, but not anymore.

"A more astute and aware buyer is in the market and they will know their options, what they want and what they are willing to pay," Campbell says. "Transit, walkability, amenities in the neighbourhood, and a good condo reserve fund will play a much larger role than ever before."