Thursday, December 3, 2015

What the CMHC Foreign Condo Ownership Data is Really Saying

Toronto Condo Foreign Ownership Jumps 49%

A comparison of the latest 2015 estimates of foreign ownership in the Toronto condo market with the 2014 results may perhaps provide the first meaningful look at the significance of foreign demand in the local market.

The survey, which asks property management companies and condo boards for the number of units owned by those with a permanent residence outside of Canada, found that the share of the condo stock that is foreign-owned increased from 2.4% in 2014 to 3.3% in 2015 (survey conducted in September and October of both years).

On the surface, it may seem like not much has changed. After all, the share of foreign condo ownership in Toronto was reported at well below the expectations of most. But when these shares are applied to the enormous size of the stock and its growth over the past year, they begin to have more meaning.

Using Urbanation's total condo apartment stock estimates from September 2014 and September 2015, CMHC's results show an implied increase from 6,423 to 9,545 foreign condo owners — equal to net growth of 49% in one year!

While we can't say for sure when these net purchases of 3,122 units occurred — they could have been bought this year as resales or in prior years as new construction pre-sales. However, there's no denying that this jump in foreign ownership occurred at the same time that the growth in the condo stock reach a record high 21,600 units in 2015.

If we assume that all of the net gain in foreign ownership in the condo market came by way of new project completions, then foreign buyers contributed 14% of the growth in the stock this year — a share that is more in line with the industry's perception of foreign demand (based on Urbanation's own surveys).

In fact, this jump in foreign ownership can be traced back to the spike in new condo pre-sales that occurred in 2011. In hindsight, we can see that new condo sales volumes were 50% higher than the latest 10-year average and that price growth accelerated to 10% in 2011, compared to a long-run average of roughly 5%. Clearly, it can be argued there was something external influencing the market.

Now, with an approximate 4-5-year lag between pre-sales and completions, the connection can be made that we are seeing the first signs of the past rise in foreign demand translating into actual built units.

So far, we have seen little, if any, market repercussions. There are no signs that the market is currently over-built or over-heated.  But then again, we also don't know what foreign owners are doing, and intending to do, with their units. They could be renting them out for a short period, having them occupied by family (i,e.foreign students), or using them from time-to-time with the intention of selling at some point in the future.

What they don't appear to be doing is buying for short-term speculation, as evidenced by moderate rates of appreciation and a very small percentage of units listed for sale in newly completed buildings. After having to put down 35% in pre-sale deposits and experiencing steady price growth in recent years, they have substantial equity in their investments.

We can also see through the evolution of new condo sales that activity has since converged back to long-run levels. So if foreign demand is just as strong today as it was in 2011, then domestic demand has pulled back. Or, perhaps, foreign demand has slowed. But we don't know. CMHC's survey only attempts to capture the share of the stock — not the flow. Until then, we're still left in the dark on foreign demand, at least for the period since 2011.

Friday, June 12, 2015

No Condo Glut: Beware of Data

As we saw this week,  a spike in unsold newly completed condos can make for big headlines and raise concerns all over North America.

But it didn't actually happen. Urbanation investigates:

The data reported by CMHC showed that the stock of unabsorbed condos jumped by 816 units, or 41%, in one month! If this were true, the number of new units belonging to no one but the developer who built them would be at an all-time high -- even higher than during the crash of the early 90s when buyers were walking away from their units and projects pre-sold far fewer units than they do today.

According to CMHC, only 69% of the condo units completed in May were absorbed, representing the first time the absorption rate was less than 89% in five years (aside from an outlier in Aug 2013). Urbanation tracks pre-sale activity in every project in development, and we haven't seen absorptions for occupying condos at less than 90% since the recessionary period in 2009. So naturally, we felt the need to investigate and were able pinpoint the issue using CMHC's Housing Market Information Portal.

A glut in Regent Park?

We found that just over half of the condos reported as being completed during May were in the core, most of which in the Regent Park neighbourhood -- 785 units to be exact -- 781 units of which in the Dundas-Queen-Parliament-DVP quadrant according to CMHC.

Where are these projects?

Two very puzzling things struck us. First, as of the end of our March 2015 survey, there were no projects under construction in this location -- so how could there be 781 completions in May? Well, part of that total most likely included Daniels' One Park Place South building that began occupancy in December 2014 according to our data. For more on the issue of the reported timing of completions see our previous blogpost:

But One Park Place South only accounts for 415 units. What about the other 366 units reported as completed in May? Could it have been One Park Place North (363 units) - the previous project to complete in the area? Hard to fathom as this building was completed and registered as of March 2014. Could it have included non-market units apart of Regent park's social housing replacement supply? We don't track such units in our survey, but neither is CMHC in their survey.

0% Absorption?

The even more surprising finding was that CMHC counted all 781 of these units as being 0% absorbed at completion! Meaning the entire 781 units were added to their stock estimate of completed an unabsorbed condos in May -- so this is where that jump of 816 units came from. But according to our data, One Park Place South was 90% sold at the end of March with just 41 unsold units. One Park Place North was completely absorbed.

So not only were completions overstated for the month, absorptions weren't reported.

We understand that CMHC has a set of criteria that their survey staff must adhere to before confirming absorptions. And since they tally absorptions at the time of completion, sometimes that information can't be confirmed in time for reporting, resulting in a default zero value.  But it doesn't mean that the confirmation won't come next month and the number of unabsorbed units will reverse -- in fact that is what is most likely to happen in June.

The Bottom Line: As more units continue to come to completion in the months ahead, this is likely to happen again. So, don't pay attention to big swings in absorption data reported by CMHC month-to-month -- look at the trend. Better yet, look at Urbanation's data on unabsorbed units -- we monitor absorptions continuously throughout the project lifecycle, reporting inventory at every stage of development from information provided directly by the developer, their sales staff and first-hand sales centre visits. At the end of March we counted 1,648 unsold completed units -- a couple hundred units less than CMHC at the time before this big jump occurred.

Context is key

What's more important is that whether the number is 1,648 or 2,803, it doesn't mean as much as it did 25 years ago when the overall market was only a quarter of the size it is today. In the early 90s, standing inventory represented 3% of the entire stock. Today, it's less than 1%. For further context, as of the fall of 2014 there were nearly 1,200 condos for rent sitting vacant and that was equal to only a 1.3% vacancy rate! So the absolute number isn't as important as its relationship to the level of demand.

Friday, March 13, 2015

Wondering how the Recent Spike in Condo Completions will affect the Market? You don't have to.

CMHC’s data on completions lags actual occupancies.

Recent CMHC data released on condominium apartment completions in the Toronto CMA is turning heads, reporting that close to 14,000 units were finished in the first two months of the year — with 10,000 in January alone. 

According to the CMHC data, completions so far in 2015 have already exceeded the total for all of 2014. In fact, the data would indicate that within a few months, completions will have already broken the annual record of 17,878 units set in 2011.

But is this really what’s going on? It depends on your definition of a ‘completion’. 

CMHC records completions as occurring after more than 90% of a building is completed, including all of the final finishes for all the units, common areas and outdoor grounds. Urbanation records completions once occupancy begins. As completions represent a key supply indicator in the GTA condo market, Urbanation feels it’s crucial to tally the data as soon as units can be considered built inventory. Contemporaneous reporting of completions alongside resale and rental listings allows for better analysis of supply pressures -- an ever-present question in local condo market.

Two good examples are the Aura and L-Tower projects, both of which weren't 90% finished as of February, but occupancy was well underway and units had already been put on the market. 

The completions happened last year

As the chart below shows, there has been a growing divergence between the CMHC and Urbanation totals over the past couple years. Given the difference in timing, this is to be expected in absolute terms as completions have trended higher. However, a substantial difference was recorded for 2014. While the Urbanation data showed a record number of completions (20,809 units), the CMHC completion totals fell back last year to 13,258 units.  The 7,500-plus unit gap suggested a large backlog of projects waiting for final touches had accumulated. And this gap didn’t suddenly emerge at the end of the year — it was present throughout most of 2014.

While Urbanation has yet to compile Q1 completions numbers, our preliminary assessment points to a total nowhere near CMHC’s figures for January and February, supporting the notion these ‘completions’ occurred last year. Effectively, these latest data points from CMHC are ‘old news’.

In this context, looking at the data over the past 12 months is more appropriate. The CMHC data, at 25,791 units to February 2015, shows compensation for the shortfall against the Urbanation data in 2014.

In the end, why is it so important to closely monitor completions as they occur? For a couple key reasons.


First, rising completions can mean a reduced inventory of projects under construction if starts can’t keep an equivalent pace (which has been the case over the past year). According to the Building Industry and Land Development Association, each construction crane represents the creation of about 500 jobs. Assuming an average project size of roughly 250 units, the 13,200 fewer units under construction in February compared to a year ago equates to 27,000 lost jobs. If accurate, that's about 1% of the Toronto CMA employment base, raising concerns that at least some temporary impact on demand would materialize until construction starts picked up (which we expect they will given the large number of units in pre-construction qualifying for financing).

A Measure of Supply

Second, calculating the number of completed units over a period time helps provide a measure of the total inflow of new supply against new demand. Household formation rates have averaged roughly 35,000 households per year over the 2001 to 2011 period. So if condo completions are running at 25,000 units and other forms of housing completions are reported at 17,000 units over the past 12 months, it may potentially indicate some oversupply developing.

While there is no way of precisely calculating total housing demand outside of the Census data reported every five years, we can test the current degree of oversupply in the market by looking to a few key variables: the level of completed and unabsorbed units, the ratio of resale transactions to listings, vacancy rates and rent growth.

Standing Inventory

According to the CMHC data, the number of completed and unsold condo apartments jumped to 1,758 units in February, nearly double its level from a year ago and the highest level since the early 1990s when the condo market, along with the rest of the housing market, last crashed.

This number is important to monitor, but it also needs context. Of particular note, is that the percentage of units absorbed at completion was 92% in January and 96% in February (in line with the 10-year average of 94%) — meaning each project, on average, that comes to completion still has just a handful of unsold units, which limits disruptions to the market. And the units may not even be offered for sale — the developer could be content with holding onto them for sale at a later date and renting them out (if a unit is rented, it is not necessarily counted as being absorbed). 

Also, the current level of inventory doesn’t mean what it used to. Over the past 10 years, the resale market has doubled in size  — so now the 1,800 units represent about a half percentage point of total built units and about 12% of the total resale and rental listings on the MLS during the fourth quarter. And demand for condos is also on the rise. Resale transactions reached a record high in 2014 and the market is tightening. 


In the fourth quarter of 2014, the ratio of sales-to-listings reached 50%, the threshold between a balanced and seller’s market. This led prices to grow at a 4% annual rate at the end of the year, which should continue to climb in early 2015 due to current conditions. Resale listings growth has been very limited, particularly in light of the high volume of completions. Urbanation calculated that less than 3% of units completed and registered in 2014 turned over in the resale market, versus 24% of which that were rented out on MLS.

Vacancy Rates and Rent Growth

Similar to the resale market, Urbanation collects data on the ratio of condos leased and listed for rent. However, there hasn't been enough variability in the data and a long enough time series to draw conclusions on its power for assessing market conditions. 

CMHC reports vacancy rates for condo rentals once a year, capturing snapshots of the condo rental market each fall. The latest data for 2014 showed that vacancy rates declined from the year prior to 1.3%, despite huge increases in new rental supply over the previous two years to the tune of 27,000 units, equal to 42% growth in the universe.

While certainly an encouraging statistic, the data may not be telling the whole story. The survey only covers units officially registered as of June of each year, meaning most of the record completions last year were missed. 

Perhaps a more accurate reading of current condo rental market conditions can be found in measurements of rent growth per sq. ft. Urbanation's calculations show that annual rental appreciation slowed to 0.8% in 2014 from an annual of average of 4.4% in 2011 to 2013. This is believed to be the first indication that the condo rental market is exhibiting more balanced conditions than suggested by the lagged CMHC data.


Look back to 2014 data for answers on how the recent surge in CMHC condo completions has affected the GTA condo market, because that's when they actually occurred. The clearest signal has emerged from within the rental market by way of reduced rent growth — but this just one indication of some modest supply pressure in an otherwise strong overall market.

It is critical to keep a close eye on completions and market conditions for condos in 2015. According to Urbanation's database of projects in development, over 27,000 units are scheduled for occupancy this year. Knowing when and how exactly how this unfolds will provide accurate market readings and allow for a better understanding of current conditions and help formulate expectations about the future.