Wednesday, March 19, 2014

How Many Condo Completions Should We Expect?

There has been speculation reported through the media recently that upwards of 70,000 condo units will come to completion by the end of 2015. This, it is suggested, will cause too much supply for prices to remain stable.
As Urbanation has the data to refute such projections, we felt compelled to weigh in with some hard facts.
Fact #1: There isn’t even 70,000 units currently under construction.

According to Urbanation, a total of 58,659 condo apartment units were under construction as of the end of 2013 in the Toronto CMA. This is consistent with statistics reported by CMHC (53,545 units) — who record starts a bit later in the process once the foundation is poured.
While there have been previous instances of completions over a two year span exceeding the number of units under construction at the beginning of the period, it has never been by a wide margin and is not expected to happen over the next two years.
Firstly, projects are getting larger and staying under construction for a longer period time — the average is more than two years. Secondly, the 24,130 units in pre-construction at the end of 2013 were collectively 60% sold — below the five year average and typical minimums required by lenders to advance construction loans — meaning starts are being delayed.
Fact #2: Scheduled occupancy dates have become an unreliable measure.
Developers have the best intentions of delivering completed units according to schedule. But, as the chart below shows, many can’t. Over the past few years there has been a growing disparity between scheduled and actual completions as development timelines have become stretched. Many factors are at play, including increasing project scale, resource constraints, building complexities and weather. Based on recent patterns and the progress made to date for projects scheduled to complete this year, Urbanation expects approximately 19,000 completions in 2014.

Fact #3: Higher completions don’t necessarily mean weaker market conditions.
Urbanation's more realistic expectations for completions this year and next (totaling roughly 40,000 units) won't, on their own, cause prices to decline. If you expect demand to remain stable, you should also expect market conditions to remain balanced and supportive of current prices levels.

Also consider the market's starting point. As shown the chart below, the sales-to-listings ratio ended the year in the upper end of the boundary characterized by balanced market conditions, which led prices to grow by over 5% year-over-year. Note that this occurred despite a record level of completions for the market in 2013. In order for the sales-to-listings ratio to fall into a 'buyer's market', listings would need to grow by more than 30% — twice the growth in expected completions.
Also note that when the sales-to-listings ratio declined in late 2012/early 2013 to the lower boundary of a balanced market and prices experienced marginal declines, it was caused by slower sales as a result of the introduction of tighter mortgage policy — not rising listings. In fact, listings followed the demand trend and helped keep the market stable.
We certainly aren't dismissing the fact the completions will be higher in the years ahead. We recognize that it creates certain vulnerabilities for the market should demand unexpectedly fall. However, we also don't believe it should be used as the main basis for projecting a decline in condo prices.