Toronto condo prices to cool, not crash: RBC report

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TORONTO – Prices will cool in Toronto’s booming
condominium market in the year ahead, but concern about a bubble is overblown as
demographics and strong investor demand will insulate the market from a crash,
economists at Canada’s largest bank said on Tuesday.

The research department at Royal Bank of Canada waded into the debate over
whether Toronto’s roaring real estate sector represents a bubble with a
seven-page report predicting prices in the city’s condo market will cool by
between 2% and 7% in the next year but will not collapse.

“The historic condominium apartment boom in the Toronto-area market is not
necessarily a sign of excess or of a bubble,” RBC senior economist Robert Hogue
wrote in a research note.

He said the condominium market in Canada’s largest city still has a lot of
strengths, pointing to a rising population, a shift in the mix of available
housing, rising rental demand, and strong interest in buying condos as

Still, recent changes to mortgage insurance rules and looming interest rate
increases will reduce the flow of buyers into the market, and there are risks
that the type of units bought by investors may not match future demand, Hogue

“If we are not in the presence of a bubble, does it mean that prices will
keep going up in the Toronto area? Not necessarily. In fact, we expect the
current upward pressure on home prices to ease substantially by next year, with
condo prices possibly coming down a notch or two,” easing by 2% to 7% from
quarterly peak to trough.

Hogue noted the Toronto area is growing by about 38,000 net new households a
year even as legal constraints on urban sprawl prevent growth in new single
family homes. As a result, buyers and builders have turned to condos to meet

While Canada’s housing market at times seems to echo the 2008 housing bubble
in the United States, there are several differences. Canada did not suffer the
financial crisis to the same extent as the rest of the world in 2009, mortgage
interest is not tax deductible as in the United States, mortgages are not
repackaged and resold among lenders, and the subprime market is very small.

While construction appears to be booming due to the presence of many cranes
on the city’s skyline, the long three-year building period before completion
means the pipeline is “not proof of excess”.

Tighter financing rules and cooling demand may mean some proposed condo
projects may not go forward, but that only serves to diminish the risk of a wave
of condo units flooding the market in the future, Hogue said.

He also noted that unoccupied condos represent about 7.5% of units completed,
about half the average since 1980, while the rental vacancy rate edged down to
1.1% last year despite an 18% increase in condo rental units.

“Unless household formation dips substantially, we would not expect the
emergence of any oversupply reaching levels that would threaten the stability of
the market,” he wrote.

Still, the market is not without risks, he added.

With no hard data on the size of the investor segment of the market —
somewhere between 15% and 60% of purchases — Hogue said a disconnect may emerge
between the type of units investors like and the type demanded by end users.

“If too many investors make wrong calls on the types of units that will
ultimately be occupied, thereby inflating demand for certain classes of
apartments, this could lead to oversupply in specific market segments (e.g.,
small one-bedroom apartments).”

The economist also said a lack of affordable new single family homes may mean
a two-tier market emerges as condo demand cools.

“In effect, we could well see the emergence of a two-tiered market: a soft
condo segment, and a resilient single-family home segment. Recent price data
already give hints of such a split, as detached home prices have been outpacing
those for condo apartments by a significant margin so far this year.

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