A housing crash based on the type of home you have? Is that really possible?
This time around, many wonder whether a specific type of housing could falter while other categories remain strong. Most eyes are on the condo market in such a scenario.
It certainly didn’t happen that way in the early 1990s. When the real estate market crashed in Toronto, the entire housing sector saw prices plunge. Even commercial real estate tanked in the high-interest rate environment.
Toronto — now the largest condominium market in North America — is the epicenter for the concern and on Tuesday another set of statistics showed that market foundering once again.
“A tale of two markets is exactly what we are dealing with. There are different things happening in each market,” said George Carras, president of RealNet Canada Inc., referring to the high-rise versus low-rise comparison.
His research company just looked at new homes but he says it is a pretty decent proxy for what will happen to the existing homes market down the road.
What is happening is low-rise sales are slowing faster than high-rise sales, yet condo prices are the ones getting hit. RealNet’s price index for a low-rise home reached $645,854 in July, up 5.3% from a year ago, while the high-rise index was $430,930, down 1.6% during the same period. The $214,924 gap between the two is the highest on record.
“It’s a complete inverse out there. A decade ago you had three low-rise choices for one high-rise, now you’ve got three high-rise choices for one low-rise,” says Mr. Carras.
High-rise sales are already falling. July sales were 34% below their 10-year average. Yet as of July 31 there are 256 high-rise developments in the GTA with 66,126 units. By the end of 2013, the market will add 17,000 condos.
In the Greater Toronto Area, provincial government policy, which encouraged intensification, has helped foster the condo market. But it’s not just a Toronto issue — Vancouver’s condo market has had the same strength over the past five years.
The Real Estate Board of Greater Vancouver says single family detached home prices are up 16.8% over the last five years while apartment prices have risen just 0.2% during the same period.
At some point I can see the markets going in two different directions
“I don’t know about a crash in one and nothing in another,” said Doug Porter, chief economist with Bank of Montreal, talking about the two different classes of housing.
“I can definitely see that happening. A lot of the [condo] market in Toronto and to extent some other cities has been driven by geography and government policy. At some point I can see the markets going in two different directions,” said Mr. Porter.
But clear differences in the market to the point they are going in opposite directions? That’s another story.
While the last market crash, discounting the brief pullback in 2008, was driven by soaring interest rates, this one could come from oversupply in one segment of the market.
This has already begun in Quebec where the condo market is feeling the impact of collapsing prices and single family homes have managed to stay in positive territory.
Hélène Bégin, senior economist with Desjardins Group, says it comes down to a supply issue which is being felt most acutely in Montreal where 30% of existing home sales come from high-rise condominiums.
“I wouldn’t say there’s been a crash as much as an adjustment of 5% to 10% that will happen in the next year. We are just seeing the beginning of it,” said Ms. Bégin.
She says the market for single family homes has been better in terms of price because it is more balanced without a massive influx of supply.
“Condo construction slowed sharply in the first half of the year which is excellent news for market fundamentals,” she wrote in a recent report.
It’s not only a supply side issue. Ms. Bégin says demand for condos has also been hit harder because people buying in that segment of the market tend to be more marginal buyers impacted by tougher borrowing rules from Ottawa.
Consumers with less than a 20% downpayment borrowing from a financial institution regulated by the Bank Act must get mortgage default insurance. To qualify for those mortgages, Ottawa has said consumers can only amortize a mortgage over 25 years which is down from 30 years in 2012 after being as high as 40 years.
Longer amortizations mean buyers have higher monthly payments and can borrow less.
Don Lawby, chief executive of Century 21 Canada Ltd., says the supply of single detached homes is going to keep shrinking.
“There are more and more condos being built in Toronto and Vancouver. They are just a better use of land,” he says.
The key for the condo market might be whether the people buying them, many investors, can rent them out. “If you have a whole lot of empty condos, the developers might bring prices down,” says Mr. Lawby.
But demand still appears strong from renters. Vacancies are rising but Canada Mortgage and Housing Corp. says the latest statistics nationally put the rate at 2.7%, still a tight market to rent in.
And, in Toronto, rental rates are just going up. A report this week from research firm Urbanation said average rents in the city were up 4.1% in the second quarter from a year earlier.
---Garry Marr, Financial Post