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.
Paul 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.”