Is Toronto’s long-running housing market juggernaut coming to an end, at long last?
Yes and no, says a new report from TD Economics. The market for single-family homes is booming under the pressure of a standalone house shortage, but the market for new condos is headed for a correction, the report states.
When it comes to single-family dwellings, the market is experiencing a shortage that is driving up house prices by double digits. Some neighbourhoods in the city have seen prices double or nearly double over the past few years.
“Demand is being impeded by lack of homes for sale on the market, leading to bidding wars and double-digit price growth,” TD economists Derek Burleton and Diana Petramala write.
Sales of houses in the city rose only 2.6 per cent in February, compared to a year earlier, but prices jumped 8.6 per cent. Fewer and fewer houses are coming onto the market, causing prospective buyers to reach “a worrisome new level of desperation to buy a house in Toronto,” as the Toronto Star put it.
That’s being reflected in the public’s attitude on housing. A recent report from BMO found Canadians are increasingly accepting bidding wars for houses as normal, with more than a third now saying they would be willing to engage in one. In Toronto, 44 per cent of respondents said they would be willing to get into a bidding war.
Condo developers, on the other hand, should be worried about the opposite problem, TD Economics suggested. While houses and low-rise condos remain in tight supply, all those high-rise towers that have sprouted up over the past few years are causing an oversupply in the city.
Some 70,000 condo units are expected to come online in the city in 2014 and 2015, well above the need for new housing. TD expects condo prices to fall 8 per cent in Toronto over the next two years. But the price correction will be concentrated in the new condo segment, because it turns out buyers don't actually want to live in the smaller and smaller condos developers have been building.
"The new condo market is increasingly finding it more difficult to compete with condos on the resale market, which are both larger and cheaper," TD says.
“Toronto’s skyline of cranes is now about to transform into a skyline of condo buildings. The number of new units scheduled to be completed in the GTA over the next two years is striking at a time when new condo sales are dwindling,” the TD report says.
“The condo market is likely to bear the brunt of the housing slowdown, but there will be knock-on effects to other segments of the market.”
TD Bank’s CEO, Ed Clark, who is set to retire this year, has been raising the alarm about Canada’s record high household debt levels. Though he doesn’t expect an all-out housing market crash, he says consumers have taken on too much debt all the same, making the economy “fragile” and “accident-prone.”
TD economist Diana Petramala seems to agree, estimating in a report last month that, at this point, an “economic shock” would send house prices in Canada tumbling 25 per cent.
Some other market observers are even more pessimistic. International hedge fund Pimco recently put its money on a 30-per-cent decline in house prices in Canada, which it expects to happen slowly, over a two- to five-year period. Pimco is limiting its exposure to the Canadian housing market.
But if there is a correction coming to the housing market, it’s hard to see it in the data so far, either for Toronto or for Canada as a whole.
Canada Mortgage and Housing Corp. is reporting a bounce-back in housing starts in February, after several months of decline, suggesting developers are still confident about starting new projects. The overall trend in housing starts appears to be flat, with little sign of a correction.
Any housing slowdown could have an outsized impact on Canada’s economy. As manufacturing employment has declined, low mortgage rates have spurred housing construction, and construction jobs have replaced many factory jobs.
Construction jobs now account for a record high share of all jobs, suggesting any slowdown in activity would have a pronounced effect on the job market.
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