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.