Toronto condo boom stirs bubble fears

Market watchers warn 20% to 30% return on investment is unsustainable

By Inman News Feed
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Market watchers warn 20% to 30% return on investment is unsustainable

Steve Bergsman
Inman News®

When is a bubble not a bubble?

That's the big question Toronto economists and developers have been trying to answer in regard to the red-hot condominium market in the city.

Toronto, with high-rise condo towers sprouting like last decade's Dubai, looks like a bubble ready to explode, but there are plenty of local pundits who say, "Nay, this city can handle every condo unit coming its way."

Here's what's going on: In 2010, about 15,000 condo units came into the market, and this was followed by a record year in 2011 with 18,000 more condo units opening up.

The market is really just gearing up. "We will average something closer to 20,000 units over the next couple of years," said Shaun Hildebrand, senior market analyst for Canada Mortgage and Housing Corp.

It gets better.

"We will end up 2011 with a record of almost 27,000 condo sales, that will be about 3,000 more than the previous record in 2007," said Ben Myers, executive vice president of Urbanation Inc., a Toronto condominium market research firm.

What's happening to all those units coming on line? Most are being rented. According to Myers, the vacancy rate for condominium rental units stands at an extremely low 1.1 percent.

All that good news caused a full-frothing frenzy among developers. Myers estimates there are currently 43,000 condo units under construction.

Those kinds of numbers make others a little nervous. Francis Fong, an economist for TD Economics, has cautioned that the Toronto region is at risk for a correction. And a report by Bank of America Merrill Lynch Global Research warns the Toronto condo market appears to be overheating and flooded with excess supply.

These people don't know what they are talking about, said Myers. "Whenever people see these numbers and all the cranes, they assume it must be a bubble or oversupply. A lot of these people are not really in the market and don't understand what's happening. They like to look at rent-income multiples and draw conclusions (based on) a few variables. It's not the case here. We are getting tremendous investor purchasing."

That's what worries me. Of all the residential sectors, the most capricious is the condominium market. A condo is generally cheaper to buy than a single-family home, easier to rent, and more subject to flipping. As a result, condo markets are prone to a lot more price movement up and down.

All this is exacerbated by investor interest as opposed to buyer/resident purchases, because the latter is more stabilizing.

Investors are a quirky, skittish group and at the first sign of market destabilization they will flee the investment sector en masse faster than an avalanche in the Canadian Rockies.

What makes the Toronto condo investment market even dicier is that a lot of buyers are foreign, who tend to come on strong in a given market -- then when things start to slow they move elsewhere.

Even Hildebrand, who remains bullish on the Toronto condo market, sees there might be limitations ahead.

"The way it works in Toronto," he said, "is developers will offer their units at preconstruction sales centers to investors or brokers that represent investors in order to generate a high sales threshold in order to get construction loans.

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