Toronto's Condo Market Performs a Balancing Act

This interview originally appeared in the March 2014 issue of CondoBusiness.



You characterize the 22 per cent decline in number of new condos sold in 2013 as a soft landing. What do you expect the story of the new condo market to be in 2014?
We’re not expecting any huge miracles out of the market; we’re expecting 15,500 sales in 2014, compared to just under 14,000 sales in 2013. So it is an improvement, but it’s still lower than longer term averages.
We’re still coming off of very frenzied levels of activity that we saw for an extended period of time – we saw sales total more than 70,000 from the second half of 2009, lasting into the first half of 2012. And that type of volume creates more condos than the market probably needs right now, so the slowdown that we saw in 2013 helped to bring the market back into balance. We’re going to need more of that into 2014, but not to the same extent. We’ll be gradually be moving back up towards the 10-year average (17,727 new condo sales), but we won’t quite get there next year.

What contributed to the 12-per cent uptick in new condo sales in the fourth quarter of 2013?
We saw project openings become more centralized, moving back into the core where demand has been strongest. Also helping to pick up absorptions at the end of the year was some of the discounting that we saw on unsold product throughout 2013. So not just introducing incentives, like cash back and free upgrades, but actually cutting prices on some of these units. This helped to improve sales at existing sites that have been active for some time. It had to do with some of the external forces as well. I think most people were expecting something severe to happen to the condo market in 2013. Then, as we saw that it didn’t and started to get a lot of positive signals coming out of the resale market – and even more so in the rental market – it helped to restore confidence among investors and others who were buying new condos.

How long will discounts from developers last?
It’ll continue for the time being. Unsold inventory levels are still at a record high, or close to a record high. We ended the year at 19,189 unsold units in active developments (would-be projects that are in the pre-construction phase, all the way up to those that are completing and occupying). There’s a very strong correlation between higher unsold inventory levels and lower project openings as developers focus their efforts on selling off that inventory before they introduce new products, so I think that’s going to weigh on sales because new openings tend to drive a lot of sales activity.

The number of rental transactions outpaced the number of resale transactions for a second year straight. What role do you expect investors to play in the Toronto condo market in 2014?
I don’t expect to see any sort of major change in behaviour. If you take a look at the units that came to completion and were registered last year, almost a quarter of them were rented out – just through the MLS system – and only about five per cent were resold. If you think of how many other ways there are to rent out your unit, you can see that upwards of probably 35, close to 40, per cent of all newly completed units, were actually rented out in 2013, so this indicates that most investors are longer term; they’re not in it for a quick flip. Their goals for price appreciation have stretched out as the market has slowed down. We only saw two per cent growth in resale prices in 2013 and we only saw 2.3 per cent growth in resale prices in 2012, so the ability to make 30 per cent within a few years just isn’t possible anymore. They’re finding that a good place to hold onto their units is obviously in the rental market right now. Rental demand in the GTA is running at probably at least a 20-year high right now. And even though we’re seeing this influx of new rental supply, rental demand has been able to keep pace, so that has helped to push rents up. Rents ended the year at an average of $2.37 a square foot, which was up about 4.2 per cent from last year. I don’t think we’re going to continue to see that type of growth, just because we’re going to continue to see strong levels of rental supply entering the market from investors, but I don’t expect any declines in rent, just more of a balanced market than what we’ve seen.

Where does this leave the resale market?
Total sales in 2013 were slightly higher than what they were in 2012 and they weren’t quite as high as they were in 2011, but they’re very closely to a historically average level, so they’re holding steady. I don’t see resale price appreciation picking up over the next few years. I think it’s going to remain very much where it has been, at around two per cent, and that’s because market conditions aren’t going to tighten up again. We’re not going to be moving back into a seller’s market.

We keeping hearing that baby boomers have plans to downsize, but first-time buyers continue to dominate the market. When do you expect to see a demographic shift?
First-time buyers are still going to be the driver of the new condo market; it’s an entry point for them to get into ownership. The average prices for condos are significantly below the average price of even a semi-detached home or a townhome within the city, so certainly first-time buyers are going to continue to represent the majority of resale condo purchasers, too. But we’re starting to see more people think about moving up within the condominium market because of high prices for single-family homes, commuting times, not wanting to leave their one-bedroom and move into a single-family home in the 905. They’d rather perhaps move into a two-bedroom or something a little bit larger and stay within the city. And then the downsizing phenomenon is not going to happen overnight. The shift in the composition of buyers in the resale market is something that happens very gradually, but we are starting to see an inflection point where first-time buyers aren’t necessarily the sole driver of activity anymore.

What are some recent hotspots for condo transactions in Toronto?
Most of the rental transactions occur in newly completed projects because that’s where the highest turnover is. And so when you look at the high-volume markets that we saw in 2013, a lot of it has to do with where these projects came to completion. One example would be Liberty Village. In the downtown core, we saw some very highly investor-purchased projects come to completion and significant rental turnover occur in these buildings. CityPlace saw a lot of rental activity in 2013. Harbourfront Market was a very strong market for rental activity as well. The Etobicoke waterfront is another market that saw a lot of turnover in the rental market – quite a bit in the resale market as well, because it’s relatively affordable in comparison to the downtown core. North York City Centre is probably one of the biggest markets for rental or resale activity in the GTA, and that held true in 2013.

What factors – for example, an increase in the interest rate – have the most potential to impact your current outlook for the condo market?
We’re factoring in only modest increases in interest rates, and I think that’s what most economists are projecting. If we did see, for one reason or another, a deterioration in economic conditions or a sharp increase in interest rates, it would obviously alter our outlook, but that isn’t the base-case assumption that most people have right now, so we’re sticking with the consensus. As long as the population continues to grow, and the economy continues to churn out jobs, and interest rates remain relatively low, I don’t think there are any major forces that are going to impact the market in 2014.

What is your response to those who still believe the condo market is due for a harsher correction?
I don’t think that the market has the ability to collapse – I mean, it does – but it’s not going to collapse underneath its own weight. Last year we saw a record level of completions (just under 16,500 units); next year we’ll move even higher. I think that’s what has a lot of people worried, but also recognize that the market is very, very large – 19,000 completions doesn’t really represent that strong a growth in the total supply. When sales started to slow down after the mortgage rules changes came into effect (in 2012), supply moved in the same direction. Even though completions were moving higher, listings didn’t really grow, so that means that a lot of investors, a lot of owners, were withholding listing their properties because they sensed that market conditions were weakening, and this helped to self-stabilize the marketplace. That’s what we expect to be the case in 2014 as well.


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