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Canadas Doomsday Forecasters Get It Wrong Again

Written by on Thursday, 02 January 2014 12:42 pm
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Predicting a housing crash in Canada has become an annual feature for some doomsday forecasters, particularly in the condo market. With unprecedented condo growth in Canada's three major cities during the last decade, some observers feel the end of the boom times must be near. But new demographic and economic forecasts show the long-term future of condos is bright.

Douglas Porter, chief economist for BMO Capital Markets, recently wrote that "amid a torrent of calls for calamity" the Canadian housing market has been "remarkably calm." He says, "Looking past some of the wild gyrations (and the wilder headlines) of the past year... we can only conclude that the reality of Canada's housing market is much more boring than widely advertised."

In a report for Royal LePage, economist Will Dunning says, "In major cities, condominium activity has become increasingly obvious, due to a large and growing number of projects that are under construction. It is understandable that the burgeoning numbers of highly visible high-rise projects will attract discussion."

The booming market prompted the federal government to tighten qualification rules in 2012 for government-insured mortgages. While that slowed the market down somewhat, it picked up again throughout 2013. The Bank of Canada expressed some concerns about the market as well, fearing that if there was a downturn in the condo market it would have a negative impact on consumer confidence and "negative spillovers to income and employment."

Dunning's report concludes that although the condo market "may experience some turbulence in the short term," in the long run "condominium living plays an important and well-established role within the housing markets of Canada's largest cities. That role will continue to grow, resulting in continued demand and expansion of the inventories though new housing production."

Dunning also predicts that condos will continue to see price growth "similar to that seen for the so-called 'traditional' housing forms."

The report notes that historically low interest rates, strong job creation in Canada's cities, especially for young professionals, and the desire to live close to work and shorten commute times have pushed condo demand.

Investors have played an important role in the condo boom. Canada Mortgage and Housing Corp. (CMHC) says that 86 per cent of the new rental supply in Toronto and 91 per cent of the supply in Vancouver are condo apartments rented out by their owners. About 23 per cent of Toronto condos and 26 per cent of Vancouver condos are rental units, says CMHC.

"Low vacancy rates in the rental apartment market and rents that are increasing more rapidly than overall inflation are signalling the existence of housing shortages and that there is a need for more construction of condominiums in order to restore a healthy balance between supply and demand," says Dunning.

CMHC, in the 2013 Housing Observer, says, "Condominium apartment rentals in Toronto and Vancouver feature lower average vacancy rates and higher average rents compared to conventional purpose-built rental apartment units, creating a favourable investor market, given the prevailing low mortgage interest rates and generally increasing resale prices."

The federal housing agency says that while the number of condos currently under construction in Toronto is high from a historic standpoint, "inventories of completed and unabsorbed units, in terms of months of supply, remain low because builders typically don't begin construction until a substantial share of units in a project are sold. Builders are expected to continue to manage their construction and completion schedules in order to avoid sudden increases in inventory of newly constructed units."

In Vancouver, says CMHC, "While the number of completed units is trending up, the level of completed and unabsorbed units…is trending lower. As in Toronto, many newly completed units find their way to the resale market." While this may lead to a softening of prices, particularly outside of the downtown core, "rental condominium demand is expected to partly restrain the growth of resale condominium listings."

Dunning says, "The U.S. experience of housing boom-and-bust" happening in Canada is unlikely.

"While there are some similarities (including brisk house price appreciation and rising consumer debt), there are also some very important differences. In Canada borrowers and lenders alike are highly cognizant of risks and are behaving cautiously - strong housing demand in Canada is solidly based upon ability to pay and upon the state of the broader economy."

CMHC says from 1981 to 2011, the number of owner-occupied condos in Canada increased from about 171,000 to 1.154 million, more than nine times faster than other owner-occupied homes. There were 461,000 rented condos in 2011, bringing the total number of occupied condos in Canada to 1.615 million.

Almost one of eight Canadian homes is a condo, and in Vancouver condos make up about 35 per cent of the owner-occupied housing stock - the largest market share of any city in Canada.

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