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.

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: http://urbanationinc.blogspot.ca/2015/03/wondering-how-recent-spike-in-condo.html.

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.

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.

Jobs

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. 

Sales-to-Listings

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.

Summary

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. 

New Purpose-built vs. Condo Rents: A per Sq. Ft. Comparison

By Fabienne Chan, Research Analyst

In addition to our quarterly reports on the new, resale and rental condominium apartment markets, Urbanation is actively engaged in site-specific market studies across the country. Interestingly, the majority of our consulting work has been focused on the market opportunity to construct new purpose-built rentals.

Whether it’s the fact that rental demand is at a 25-year high (at least), that condo rents have grown by about 20% over the past five years, that vacancy rates are ultra-low, the availability of low interest loans and tax incentives to build new rentals, or the perhaps the diversification of developers away from condos, attention has shifted sharply to the purpose-built arena.

With condos representing 99% of new rental supply in the GTA, our ability to provide accurate market valuation assessments has benefited tremendously by drawing information from the UrbanRental database — our proprietary database of condo rental market data by project.

In the course of conducting our research we have come across several instances where new purpose-built projects have been achieving higher per sq. ft. rents than comparable condo projects. For this blog post, we decided to zero in on some examples within the City of Toronto.

Five recently completed rental apartments were selected: One32 (2013), Motion (2012), WestQ (2012), Minto Roehampton (2007), and Jazz (2006). Using the UrbanRental database, we identified condo projects that were (i) within a 500 metre radius of the site, (ii) built within the last 10 years, and (iii) were of a comparable scale as the rental buildings selected.

One obvious impediment in making rent comparisons between purpose-built and condo projects was the difference in sample size — condo transactions were plentiful in the year-to-date 2014 while rental information for purpose-builds was relatively scare due to low unit availabilities. The data used to represent rental projects for this study were obtained via their websites or through the property management offices. 

The map below shows the location of the purpose-built rental projects examined represented by blue markers and their surrounding comparable condos by red markers.

Four out of the five purpose-built projects surveyed had higher per sq. ft. rents than their surrounding condo projects. Within the four projects, premiums ranged from 1.4% or $0.04 psf (Jazz) to 7.2% or $0.20 psf (Minto Roehampton). Differences in unit sizes played some part in the purpose-built premium (smaller units tend to generate higher psf rents), with suites at Minto Roehampton roughly 130 sf smaller than leased condos in the area. Slight variations in location, buildings age, suite layouts and finishes, project amenities, and floor heights of the units surveyed may also explain some of the gap. However, across the four projects these differences appear to mostly balance out and the average premium for purpose-built units was 4.4% or $0.12 psf.

When including Motion, which posted lower psf rents than its condo comparables (mostly due to having a larger range of suite sizes), the average premium across the five projects falls to 1.7% or $0.05 psf. 

In the end, the results indicate that there does appear to be at least some premium achieved by purpose-built rentals over competing condo supply. All else being equal, renters tend to favour a professionally managed and secure source of housing. Of course values in new purpose-built projects can also receive a boost due to their scarcity. 

The findings are encouraging for rental operators who will continue to face competition from a high volume of investor-owned condos coming to completion in the next few years. However, beyond 2017, condo supply growth will slow considerably due to fewer project launches over the past two years. This further supports the case for considering purpose-built development today.

For more information on this research or to inquire about Urbanation’s UrbanRental reports and consulting services, please contact Shaun Hildebrand at (416) 922-2200 or shaun@urbanation.ca

Rental Condominiums are Not Just for Downtowners

By Pauline Lierman, Director of Market Research

The focus on the sheer numbers of condominiums rented—a record 22,302 units over the four quarters up to Q3-2014—is often on the rapidly growing downtown areas of the “416”, mostly in the neighbourhoods stretching east and west of Yonge Street. Indeed, 78% of all rentals in the past year have been in the amalgamated City of Toronto, 47% which were within the former City's boundaries.

 

But what about the suburbs, aka the “905”? The 22% of rentals in the Toronto CMA that occurred in the 905 Region since Q4-2013 represents a total of 4,838 rented units. For market areas still very much associated with single family household living, this total is not inconsequential. 905 rental growth is accelerating at a pace stronger than in either area. Four quarter rental activity in Q3-2014 in the 905 region was 24% higher than the previous four quarter period. In contrast, the 416 rate was 16%. As the chart shows below, condominium rentals in the 905 region grew at a higher rate annually than in the 416 and the entire CMA in the third quarter.



The momentum behind the growing share of 905 rentals relates to its burgeoning supply. New units from condo completions were added at a faster rate in the 905 than in the 416 over the last four quarters. While the overwhelming number of new units are still found in the 416, the area’s share of new rental units in the Toronto CMA fell from 80% to 70% between the current and previous four quarter periods. Consequently, the share of new rental units in the Toronto CMA in the 905 leaped from 20% to 30%. Higher supply tends to translate into an increase in rented units, and as the following chart shows, the share of rental transactions in newly registered building in the Toronto CMA has been rising in the 905, reaching 48% in Q3-2014. Over the past 12 months, newly registered rental units in 905 buildings comprised 34% off all new rentals, up from 15% in the prior 12-month period.

 

 





The trend toward more 905 condo rental activity can be expected to continue into 2015. New condominium sales surged in the 905 in 2011 and 2012 in a wide distribution of areas, from Markham City Centre to near the Vaughan Metropolitan Centre, Mississauga City Centre, along Richmond Hill’s Yonge Street corridor to as far west as Burlington and Milton, which will result in many new buildings. Occupied but not yet registered units increased 17% in the 905 region from a year ago, with 2,192 new condominium units nearing their final closing. With rental rates on average hovering around $2.00 psf in the main 905 market areas, all this new inventory will likely have an inflationary effect on this small and growing market.

 



Linking Condo Activity with the Stock Market

Much of the business section in recent weeks and months has been devoted to columns questioning the sustainability of stock market index levels. The S&P/TSX Composite Index closed the second quarter at its highest level ever, up 25% year-over-year, with the value at the end of the fourth week of September 10% higher than at the beginning of the year.

Some explanations offered for the recent run-up include stronger oil prices, surging bank stocks and industrials, discounts in relation to U.S. stocks, improving economic growth and central bank commitments to hold interest rates low for an extended period of time.

While most financial industry analysts see this recent rally as being in its final days and recommend portfolio adjustments to gear up for disappointing market returns in the future, the prospect for a significant correction remains uncertain. Robert Shiller, the Nobel Prize-winning Yale economist, has compared today’s market valuations to peaks in 1929, 1999 and 2007. However, many believe that the market is in store for a series of minor corrections, to be followed up by more buying as perceived ‘value’ grows against a backdrop of improving economic fundamentals.

So why are stock market movements important for the condo market?

While new condo sales have followed the general path of many economic variables over the past 10 years with various degrees of correlation, their fairly close relationship to the stock market is worth paying at least some attention to.

Over the past five years in particular, new condo sales have shown a strengthening, albeit still moderate, correlation to stock market values with a one quarter lag. While this may seem counterintuitive as condo investing is often thought of as a substitute for financial investments, it can suggest that condo buyers use financial gains to invest in condos, or buy units because they feel wealthier thanks to their rising financial portfolio. The same relationship occurs on the downside, where buyers feel more cautious as financial values slide. Whatever the reasons, more research on this topic would be welcomed. (As a side note, condo sales have shown a lower correlation to REIT index values).

The chart below shows that when new condo sales volumes in the Toronto CMA and stock market growth pull away from each other, they tend to tend converge in subsequent quarters. Sales often overcompensate when catching up, which is shown to be followed by a more drastic change in course for the market (as seen in 2012-2013). Recently, new condo sales have been rebounding alongside the run-up in stock market values. However, sales remain well below their recent peak in 2011 while the stock market is reaching new highs.

 

 

 

The questions then become: will condo sales continue to benefit from the ‘catching up’ phenomenon previously observed and, if there is a stock market correction of any magnitude, what impact will there be on the new condo market? The problem with answering these questions is that our historical point of view is limited as the new condo market is still growing off a relatively small base from 10 years ago.  While Urbanation has been tracking the market for over 30 years, there lacks a sufficient volume of activity within the time series to conduct a more proper statistical analysis.

Nonetheless, we can tell from recent trends that the stock market now appears to be one of many indicators to look at when assessing condo sales trends. Whether the stock market ‘treads water’ or experiences an outright rout, repercussions for the new condo market can be expected. This suggests that paying attention to financial industry analysts may be (almost) as important as paying attention to condo industry analysts.



Urbanation and Marsh have Merged

TORONTO, Sept. 17, 2014 - Two of the Greater Toronto Area's most respected real estate market research and analysis companies, Urbanation and the Marsh Report, have merged to offer enhanced services and the most comprehensive data available to their clients.

Urbanation, the GTA's foremost authority on condominium research and data, monitors activity in projects that are proposed, in development or have been built, to generate key market metrics such as total sales, listings, unsold inventory, and average prices and rents per square foot.  Urbanation publishes two quarterly reports: theCondominium Market Survey, considered the "industry bible" for stakeholders in the highrise condominium industry, and Urban Rental.

Urbanation has acquired a 50 per cent stake in the Marsh Report, started in 1989 by John Marsh and purchased in 2008 by Yvonne Whyte and John Davies. It is the best source of data and interpretation for major sales in the GTA and produces two quarterly reports:  one that lists land sales in the GTA and one that lists the sale of commercial and institutional buildings. Its subscribers include real estate investment firms, financial institutions, real estate brokers, appraisers and government departments.

"Urbanation has the best market research and analysis of the residential condo and rental market in Toronto," saysEve Lewis, principal/co-founder of Urbanation Inc. and principal and president of the leading condo marketing firm, MarketVision Real Estate Corp. "The Marsh Report has a spectacular reputation, a long history and a lot of market knowledge. It seemed like a perfect complement to Urbanation."

"We have availed each other's services for some time and I always felt it would be a good fit because of the type of research we do," added Marsh Report principal Yvonne Whyte.

Ms. Whyte and Ms. Lewis said by joining forces, Urbanation and the Marsh Report will offer customers complete and seamless market research and tracking, from the time when a parcel of land is initially purchased through to complete development and completion of a site.

Ms. Lewis, who has become involved in retail and office building leasing since she took over her late husband's company, Woodcliffe Landmark Properties, three and a half years ago, could see the appeal for existing and new customers in packaging Urbanation and the Marsh Report services together.

"As we move forward, with apartment buildings and other aspect classes, it (the merger) allows us a lot of synergies and efficiencies and a broader depth of service to our clients, and information they wouldn't normally be able to source," said Ms. Whyte.

"The reports will be the only ones of their kind on the market. Urbanation has made significant investments in computer software to bring more value to clients and will be looking to provide that to the Marsh Report," said Ms. Lewis.

"Together, we have a better platform and a synergy to undertake enhanced services," said Ms. Whyte. 

For interview opportunities with Eve Lewis, please contact Vicbar Marketing at 416-510-0073 orvgriffiths@vicbarmarketing.com

Condos Aren’t to Blame for "High Rents"

A recent OECD report on Canada (reported in a Globe and Mail article) suggested that the condominium market has played a big role in creating a shortage of affordable rental housing.

It argues that because developers favour building condos over rentals (for a number of reasons), the growth of condos has crowded out new rental construction. And, because investors are buying new condos and renting them out, their units are raising rents to levels beyond the reach of average renters.

But is the condo market really to blame?

They certainly have become the dominant form of new rental supply in the GTA. As the table below shows, condos have accounted for 99% of the net change in the total rental apartment stock over the past five years. Over one quarter of all condos are now used as rental. But while the supply of condo rentals has seen remarkable growth of 80% since 2008, they represent 25% of all apartment rentals – meaning traditional rentals still represent three quarters of the market. This share is consistent for the City of Toronto.

As shown in the chart below, the average rent for purpose-built rental units in Toronto is considerably less than condo rental apartments ($1,035 vs. $1,576 for one bedrooms and $1,225 vs. $1,835 for two bedrooms). A couple key factors are that the stock of purpose-built rentals is mostly outdated, and most are subject to rent control – rents for sitting tenants can only rise by provincial guideline amounts (2.5% in 2013 and 0.8% for 2014).

But notice that rents in purpose-built units constructed since 1990 (rent control doesn’t apply to buildings built after 1991) are very close to condo rentals — a difference of $111 for one bedrooms and $144 for two bedrooms. In fact, there are many examples of new purpose-built rentals charging above nearby condo rentals.

Ultimately, when including condos in the measurement of average rents for all apartments in Toronto, the level rises by just $97 (see chart below). In other words, when excluding condos from the equation, average rents for apartments in Toronto are 8% lower.

So it can be said that condos have played some role in raising overall rent levels in the market, but certainly can’t be blamed for creating a shortage of what is defined as ‘affordable’ rental housing. Why? Because it can’t be said that rents would necessarily be lower if the growth in condo development was replaced by purpose-built rental construction.  Investor-owned condos, which have been declining in size, are actually attributed to slowing growth in rents — average condo rents were down 1.7% year-over-year in Q1 according to our latest UrbanRental Report (although still up year-over-year on a rent per square foot basis).

If a housing segment is to blame for crowding out purpose-built rental construction, then look towards the low-rise market. Population density, provincial growth policy and land availability in the GTA have dramatically shifted development away from low-rise homes, leading all development to gravitate towards high rise and creating greater competition for multi-residential land. High-rise is now the dominant form of construction, representing over half of all housing starts in each of the past four years compared to a 30% share 10 years ago.

The lack of low-rise supply has played a major role in pushing up housing prices in the GTA and impacting ownership affordability. As shown in the chart below, when excluding condos, average resale prices have grown by 84% over the past 10 years. By comparison, condo values have appreciated by 63%. As a result, the gap between the average price of condos and their alternatives has grown to a record $233,000, which is more than twice the gap from 10 years ago.

It can be argued that if it weren’t for the growth we’ve seen for condos, we would be facing a much bigger housing affordability issue. Not only would rents be likely close to or just as high as they are now, prices for entry-level homeownership would be out of reach for first-time buyers, spiralling towards even lower rental vacancy rates and an even greater shortage of ‘affordable’ rental units.

Toronto Condo Market by the Numbers

An Infographic of our Q1-2014 Results

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.  

 

 



 

Urbanation Response Part 2: Do Condo Rents Look Poised to Fall?

This is the second part of a Blogpost that responds to research findings reported through a recent Globe and Mail article that states condo rents are declining.
 

This post will address the validity of the claim made that “the Toronto rental market may no longer absorb supply as it comes on-stream, resulting in lower rents and increasing cash outflows for landlords…”
 

The first part to this blog post addressed the more glaring issues related to the quality of the research conducted that found condo rents are declining.

Condo rents are not falling

As mentioned in Part 1 of the blog post on this topic, Urbanation tracks condo rental activity through the MLS system, which we estimate covers at least two-thirds of the market.  We marry transaction data with our own proprietary database of square footage measurements for condo units, first taken from developer plans and then verified post-registration from surveys submitted to the land registry.

Our data shows that on a per square foot basis, average rents in the third quarter grew by 4.2% from last year. While a rising inflow of newly completed units with above average rents per sq ft are helping to push this level higher, our same-sample analysis (using only buildings common to Q3-2012) still shows rents are growing, albeit at a slightly slower pace of 3.5% year-over-year. This reflects a market that is starting to balance out following three years of exceptional growth in rents. But note that the rentals-to-listings ratio remains elevated at above 70%, which still supports further growth in rents.

Demand will be able to absorb new supply

We expect that the emerging trend towards more balance in the rental market will gradually continue over the next couple years. As more units come to completion, more investor-held units will be listed for rent. But it’s important to recognize that rental demand is currently running at a 20-year high, driven by such factors as reduced ownership affordability for first-time buyers, strong growth in the population aged 25 to 34 and migration into the core. This, combined with the lack of growth in conventional rental supply, is why vacancy rates remain near historic lows despite the growing supply of condos — which made up 85% of the growth in rentals over the past 10 years.

Assuming a flat profile for household formation and ownership rates, the number of net new renter households will average around 10,000 per year out to 2016. Over the same period, condo completions are expected to average 20,000 units per year. Assuming 60% of these units are owned by investors and 3/4 will list their units for rent, we will see an average of roughly 9,000 condo listings per year from new completions. While supply can also be added from older condos (as owners hold onto their units after moving out) and some new purpose-built units, the point is that demand and supply should remain at similar levels.  

                                       

This isn’t to suggest that the market won’t change — we firmly believe that more balance is on its way. Realistically, there are likely to be short-term periods of weakness experienced in selected areas of the market over the next few years. But on the whole, the market should not experience a pervasive decline in rents. However, this may not be enough to keep some investors from looking to sell their units. It’s no secret that cash flow margins on rental units have become squeezed, and they will remain that way as higher priced units enter the market and rent growth slows. But with vacancy rates expected to remain low, the equity accumulation inherent in having a steady stream of rental income go towards mortgage costs and principal repayment will continue to encourage most investors to hold.

Condo investors recognize the advantages that leveraging a low-cost mortgage brings, as well as the sense of security in owning a piece of property, which is particularly shared among new immigrants who tend to be big purchasers in the market. So it’s difficult to assume that because unlevered cap rates are below financial market dividends that investors will begin to suddenly change course.

History has taught us that supply tends to direct itself towards where demand is strongest. The exceptions being when owners are forced to sell because they can’t close on their homes or can no longer afford their mortgages — neither scenario should have enough prevalence to impact the market. Should the economy remain stable and interest rates remain low, mortgage arrears will remain near historic lows (0.31% in Ontario as of August 2013). As a greater volume of units come to completion, there will naturally be more reports of buyers struggling to close on their units, but they will continue to represent a very small minority. The vast majority of units set to complete have deposits paid of at least 15% (equal to around $60,000 on a $400,000 unit) — buyers will do whatever they can not to lose their investment. They have also been pre-qualified to close – something banks require before advancing construction loans (despite reports of the contrary).  

The market will be challenged by resisting forces for price and rent growth over the next few years, but should remain stable in the absence of any strong deterioration in confidence. The media can help to prevent this by, at minimum, offering readers a more balanced selection of informed opinions on the market. 


Part 1 - Do Condo Rents Look Poised to Fall?:  http://urbanationinc.blogspot.ca/2013/11/urbanation-response-part-1-do-condo.html