More signs of a coming condo glut

As I’ve noted before, the Toronto condo market is near its saturation point and looks set for a fall.   The city currently has 286 active condo projects currently underway, representing 73,953 units — by far the most of any city in North America.  This level of development is significantly outpacing the expected level of demand considering net household formation in the GTA.

But yet the units still sell.   Data continues to suggest that the market is being supported by ‘investors’ who are currently buying between 30 and 40% of all new condos despite the fact that the majority are cash flow negative.  A Globe and Mail piece published in August estimated the investor demand for new condos at 40% of total, though it didn’t indicate exactly where it got that estimate from.

This estimate seems fairly consistent with estimates from those in the industry.

“Many of the city’s condos aren’t purchased by end users. Rather, they’re often bought by investors who rent them out. If they can’t rent them, the alternative is to place them back on the market for resale, further adding to the city’s condo supply. Barry Lyon, president of N. Barry Lyon Consultants Ltd., sees this as a possible concern. “We’re all watching the rental market carefully. Thirty per cent of the condo market is defacto rental investor — some offshore but most are local.”

This amounts to pure speculation and will likely last only as long as upwards momentum remains.  While prices have remained firm, the first cracks are starting to show.

In January the Toronto Real Estate Board noted that in the last 4 months of 2010 there was a 22 per cent increase in condo rentals on the market over the previous year.

Now Scotia Economics has added some interesting data points to the discussion.  In a report released yesterday, they note that unsold new condos have increased steadily since mid 2008 and are now approaching the all time highs from the early 90s.  Unfortunately this is aggregate data that encompasses all major Canadian markets, but coupled with the TREB data on rental inventory, it nevertheless paints a troubling picture.

Despite the current high levels of unsold new inventory and glut of projects currently under development, multi-unit starts have slowed little while single family starts have slowed significantly since early 2010.

The glut of rental condos has pushed the condo vacancy rate in Toronto to 2%.  Not alarmingly high by any means, though once put in perspective it does take on a different light.  At 2% this number represents the highest vacancy rate in the GTA since CMHC began tracking such data in 1993.  Furthermore, this represents a doubling of vacancy rates in 12 months.  Finally, as TREB noted in their rental market report, a growing number of condo investors are choosing not to rent their condo out.  This masks the true ‘vacancy’ rate as there are far more empty condos than the CMHC data suggests.  Exactly how many is the $64,000 question.

The data is increasingly confirming that the Toronto condo market is reaching a saturation point.  How this excess inventory will be absorbed in what will very likely be a time of falling demand is the major unknown.  Complicating matters further is the fact that condo speculators who are banking on capital appreciation to ensure a profit (a large and growing segment of the current market) are notoriously prone to dumping their holdings when the illusion of perpetually rising values begins to fade.

Cheers,

Ben


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7 Responses to More signs of a coming condo glut

  1. Jordan says:

    It would be fascinating to find out what the actual vacancy rate is for Toronto condos, i.e. what % of condos are owned by someone yet not occupied. Apparently in Vancouver this figure is significant.

    • It’s not alarmingly high at present…..in the ballpark of 2%. But as you note, that number is deceiving. Even a recent TREB report indicated that a number of investors were choosing not to rent our their condos. These numbers are not caught in the data.

      Even at 2%, if we look at it from a historical perspective we find that this is the highest condo vacancy rate in Toronto since CMHC began tracking this data in 1993. This number has also doubled in one year.

      http://www.cmhc-schl.gc.ca/odpub/esub/64459/64459_2010_A01.pdf?lang=en

      • I added this info into the post.

      • Jordan says:

        Right, and what I’d be most interested in seeing is a measure of how many people are just holding empty units (not even attempting to rent them out) — not “vacancy” as it is usually defined.

        My curiosity here is inspired by anecdotes about completed buildings in Vancouver that are “sold out” yet seem to have very few actual occupants. Perhaps one of the resident Vancouverites here can shed some light.

  2. jesse says:

    The condo inventory looks very Beijing-Shanghai-esque to me. Just saying… the patterns of holding unsold inventory and financing presales are strikingly similar.

  3. Vince says:

    Excellent article! Living in Toronto I have noticed that condos are being built closer to the core. That means they are of the expensive variety. If someone can prove to me that there has been a surge of employment for jobs over $200k a year, I’d love to hear it!

  4. L Dub says:

    I just got a rental condo in downtown T.O (harbourfront area)
    for $1175/month with parking (In January he was asking 1275/month)

    similar units are are going for 260k+ to buy (+ parking)
    so if i bought my carrying costs (including property taxes/condo fees would be at least $1600/month)

    the guy i rented says he is taking a loss renting it out to me.

    but that “is his plan in the long term”

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