Monthly Archives: February 2015

Unsold Toronto Condos

Why Are There So Many Unsold Condos in Smaller Canadian Markets?

Toronto, and several other comparatively smaller Canadian cities, are beginning to show declines in condominium sales, which is leading to an over-supply of unsold units. Interestingly enough, the issue is being attributed to federal rule changes applied to mortgages that occurred almost three years ago, and the effect these changes have had appear to affect cities of varying sizes in different ways.

Tasmin McMahon of The Globe and Mail, offers up his outlook on the consequences of the implementation of stricter mortgage rules back in June 2012, limiting mortgage insurance to amortization periods of 25 years or less from 30 years. He notes that the “overheated” condo markets in Toronto and Vancouver were believed to be affected by these changes the most, but in reality, it’s smaller cities that are feeling the backlash of these regulations the most. Winnipeg, Montreal and Moncton have a surplus of unsold condo units driven by a surge in new construction and a dwindling supply of first-time buyers. The major metropolises of Toronto and Vancouver were saved by an influx of wealthy local and foreign investment, whereas the real estate market of smaller cities are largely dependent on first-time buyers.

Unsold Toronto CondosPaul Cardinal, manager of market analysis for the Quebec Federation of Real Estate Boards, said in regards to the new mortgage rules and their effect on small Canadian cities, “It definitely had an effect on first-time buyers. What’s not really intuitive is that you would have thought the most expensive markets would have been impacted more than the less expensive market, but that’s not necessarily the case.” Cardinal raises an important question in the irony he identifies, wondering why smaller cities were hit harder by the rule changes. McMahon uses Montreal as a case study in an attempt to try and illustrate the typical real estate market conditions of a smaller Canadian city since 2012. Condos were a hot ticket item in Quebec as a whole in 2012, with plenty of young buyers, “armed with cheap mortgages,” flooding the market with sales. This inflated initial demand caused many developers to ramp up condo construction, even in the face of declining sales and softening demand in 2013 and 2014. Montreal in particular had a backlog of nearly 3,000 unsold condos in 2014, yet condo starts in Montreal rose 19%.

Justin da Rosa of Mortgage Broker News, offers some counter-evidence to refute the claim that only small Canadian cities were affected, providing figures to paint a picture of Toronto’s unsold condo market. In the month of January, with a record number of unsold condos that hasn’t been this large in almost ten years. In Toronto, 10,368 condos were completed in the GTA, a record for the region and eight times more than the average over the past decade.  Sal Guatieri, senior economist for BMO wrote in his latest economic report released earlier in the week, that the increase in unsold units will have a positive impact on price, potentially slowing the increase of new condo prices. But offers a disclaimer, “as long as demand remains healthy (last year was the third best on record), prices should hold steady.”


The Trend Towards Micro-Condos

There is a growing trend picking up steam in Canada that has its roots in places like Japan, and a few larger metropolises in Europe. It would appear that more and more people, looking to find a residence in a sprawling downtown core without having to pay downtown prices, are choosing to live in “micro-condos.” Such units already have a presence in Vancouver’s largest cities, like Surrey and Victoria. But an influx of these units are in there final stage of construction and development now, with potential buyers and renters expected to flock to these units by the summer. There are nearly 3,000 micro condo units under construction in Toronto that are slated to be completed this year, according to Shaun Hildebrand, vice president of condo research firm Urbanation.

According to Sandra Rinomato of Canada AM, the typical micro-condo unit is extremely small, ranging in size anywhere from 220-400 square feet. Alexandra Posadzki, refers to them as “shoebox condos,” comparing them to the size of two average living rooms, while Jason Proctor of CBC News describes them as the housing equivalents of Swiss army knives: “compact, brilliantly designed units that pack a seemingly unlimited cache of hidden space into 300 square feet.” Furniture is designed to maximize on the available space, such as fold up beds (which are standard issue in the units), with storage space often hidden away. Make no mistakes, these units are minimalist spaces, intended to cater to a very specific kind of lifestyle. The big trade off potential home buyers and new condo renters are willing to make involves trading personal space for communal space.

Opinions regarding these types of units vary, with some real estate analysts and observers pointing out some obvious flaws. For example, Rinomato argues that having only a few items out of place could force the entire unit to look cramped, making the space seem more confining. However, she also suggests that micro-condos make attractive sale units for real estate agents because they typically rent for more money per square foot than their larger counterparts. Hildebrand says condos under 500 square feet can bring in well over $3 per square foot, while the rest of the market averages around $2.50 or $2.60.

micro-condoSecuring the financing needed to purchase one of these micro-units can be exceedingly difficult, considering most banks and lenders have minimum square footage requirements. The concern being, that investors will sell off the properties in droves if the housing market starts to decline. This particular point seems ironic, considering that many investors are touting these units as being an excellent entry point into the market for young professionals. “There are minimum square-footage guidelines that vary market to market, but the most important factor is the condo’s marketability,” according to CIBC spokeswoman Caroline Van Hasselt. The true issue at heart has to do with demand uncertainty. Because these types of units are so new, no one can truly accurately predict how well they will sell in Canada’s major cities.

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Rates Drop Toronto Real Estate Market is Red Hot

With temperatures dropping to minus double digits old man winter left us looking for something to warm up to, and the January 2015 Real Estate market did just that.  With sales up 6.1% from January 2014, the red hot market gave us the heat we needed, selling 4,355 properties in all of GTA.  With a 9.5% increase in new listing in the first month of the year, we saw a decrease of 2.5% in active listings from January 2014 – leaving us with a hot winter market with average days on market of 31.

Both the 416 and 905 are in the green this month, with average prices increasing for all home types.  The largest rise with 14.5% in price is Townhomes in the 416, selling at an average of $502,267.  In the 905, the average price for Semi-Detached properties was $455,653 an increase of 9.4% from last January.

“The January results represented good news on multiple fronts. First, strong sales growth suggests home buyers continue to see housing as a quality long-term investment, despite the recent period of economic uncertainty. Second, the fact that new listings grew at a faster pace than sales suggests that it has become easier for some people to find a home that meets their needs,” said Toronto Real Estate Board President, Mr. Paul Etherington.

With the drop of mortgage rates from top banks, we will see home prices grow immensely around the Greater Toronto Area. The strongest rates of price growth will be experienced for low-rise home types, including singles, semis and town houses. However, robust end-user demand for condo apartments will result in above-inflation price growth in the high-rise segment as well,” said Jason Mercer, TREB’s Director of Market Analysis.


Examining the Connection Between Oil and Housing Prices

The dropping price of oil, and its effect on the Canadian housing market, was a topic touched upon in the last article published on January 27, entitled, The Two Factors That Will Decide Toronto’s Housing Market in 2015. But, we here at iHomes thought it necessary to explore the topic in more detail. To offer up more than just a quick overview of the effect a decline in oil prices may have on resale housing prices, and instead, examine some of the theories offered up by financial analysts and economists on the connection between oil and real estate.

A lot of attention is being paid online to a recent Royal LePage house price survey and market forecast, which they publish annually, released on January 14. Susan Pigg of The Toronto Star, offers up her synopsis of this report. Initially, LePage predicted housing price increases average 2.9% across Canada, moving the average price of a home to $419,318, up from $407,500 last year. The report highlighted Toronto specifically, predicting that the GTA would experience the highest percentage growth in housing prices compared to 2014, with an expected increase of 4.5%, bringing the average resale price of condos and houses combined across the GTA to $592,000 — up from $566,500 in 2014 and $524,089 in 2013.

Royal LePage would later revise its forecasts, having to account for the deepening slide of oil prices. According to Royal LePage chief executive officer Phil Soper:

“In the immediate term we anticipate that the natural slowing of home price appreciation we called for in the third quarter of 2014 will be delayed in Central Canada and accelerated in the West by recent developments in the energy sector.”

But why is Western and Central Canada more susceptible to declining house prices resulting the declining value of crude? Chris Matthews of Fortune, has one possible answer, making the argument that if declining oil prices are expected in the long term, we can also expect to see home values “in markets with a high concentration of energy sector jobs,” also to decline. Referring to historical trends in the U.S. housing market, Matthews quotes Trulia Chief Economist Jed Kolko, who contends that oil price drops have historically been associated with job losses and falling home prices in energy-producing regions. The chain reaction that Matthews and Kolko are alluding to is not one that is difficult to decipher. Those working in regions that are heavily dependent on the oil industry, face a greater risk of losing their jobs when labour costs need to be cut in order to compensate for the declining value of oil. Fewer employed adults means fewer potential homebuyers, leading to declines in the price of homes in order to draw in buyers who may be on the fence. Michael Babad of The Globe and Mail, suggests that such changes are already taking place in Alberta, causing both job cuts and major project delays.

It isn’t all bad news when it comes to slumping oil value. Soper noted that dropping oil prices make it far less likely that interest rates will rise, which will benefit homebuyers nationally. Babad claims that potential homebuyers in Ontario stand to gain from oil price decline, getting to enjoy the subsequent depreciation of the Canadian Dollar.