Toronto Condo Kings Retreating to Avert Crash: Mortages

Toronto Condo Kings Retreating to Avert Crash: Mortages

Toronto condo builders are slowing development in a bid to avoid a crash after a decade-long boom led to 159 towers now under construction.

So far this year, they’ve announced 13 new condominium projects, the fewest since the recession in 2009, when there were just three over the same period, figures from real estate researcher RealNet Canada Inc. show. In the same period last year, 29 new projects were announced, including Tridel Corp.’s Ten York, the third-tallest residential tower in the country at 75-stories when it was first marketed.

“Most developers have their hands in their pockets right now,” said Brad Lamb, president of Brad J. Lamb Realty Inc., a developer and the city’s largest condominium broker. His firm, which is marketing more than 45 high-rise developments in the city, won’t start a new project until 2014, Lamb said in an interview at Bloomberg’s office in Toronto. Lamb said he has eight projects in Toronto and Ottawa “on the drawing board.”

The slowdown comes as a near-record supply of condos comes to market in a city with the most towers being constructed in the world, according to BuzzBuzzHome, a Toronto-based real estate listings and research firm. Developers are trying to manage the slowdown as buyers retreat amid tighter mortgage rules, a slowing economy and the burden of record consumer debt. The supply of new high-rise units reached 21,262 in February, 34 percent more than the same period a year ago and close to a record 21,696 in October 2012, RealNet figures show. About 61,000 units are currently under construction — the most ever — and a record 35,757 residential units will come on stream next year, RealNet said.Canceled Lumen

Developer Concord Adex postponed its previously announced Lumen this year, a 30-story building in a cluster of condos near the Gardiner Expressway, a major highway that connects the western suburbs with the city, according to BuzzBuzzHome.

Menkes Development Ltd was one of the first to announce this year, putting its 29-story 365 Church development on sale for purchase in March. Due for completion in 2017, unit size starts at 323 square feet (30 square-meters), among the smallest in the city.

“Condo prices are not going up now the way they have been,” said Finn Poschmann, vice president of research at the C.D. Howe Institute in Toronto. “From the developers’ side, they’re saying ’OK. Enough is enough right now. We’re digesting a shift in the market as it is and we really don’t need to be beat up more.’”

Sales Dropping

Sales of high-rise homes in the city have dropped 34 percent since 2011, after rising 64 percent in the past decade until 2012. Prices have declined 5.5 percent over the past two years, according to RealNet.

Sales are weakening after the government tightened mortgage rules to curb record household debt and orchestrate a so-called “soft landing” in the housing market. Benchmark interest rates held at 1 percent since 2009 in the longest pause since the 1950s stoked a housing boom. The government has been trying to rein it in, shortening amortizations in June to 25 years from 30 years, the fourth time in four years it tightened home loan regulations. The Office of the Superintendent of Financial Institutions also introduced tougher standards for lenders.

The government has also pressured banks not to cut home loan lending rates below 3 percent, with Finance Minister Jim Flaherty saying on March 19 that “we don’t want a race to the bottom on mortgage rates.” Manulife Financial Corp. (MFC) withdrew a promotional 2.89 percent five-year fixed mortgage rate after the finance department called the bank to express the minister’s “displeasure.”

Governor Warns

The effect of the government’s focus on rates and borrowing was that many first-time home buyers were priced out of the market and grew cautious as Mark Carney, the Bank of Canada governor, emphasized the risk to an over-heated housing market, Poschmann said.

“Everyone knows that soft landings are difficult to negotiate,” Poschmann said. “So you use multiple tools, you push on multiple buttons, and that’s what the government has done.”

Investors are beginning to hear about the high amount of supply and are backing off, Will Dunning, president of real estate market analysis firm Will Dunning Inc., said in a phone interview from Toronto. The government’s mortgage tightening has taken at least a quarter of condominium buyers off the market, he said.

Attractive Investment

“Low interest rates made condos a very attractive investment, I wouldn’t say a bubble but I would say too much activity,” he said. “There are multiple outcomes, including the investor saying ‘It’s time to get out of this market’ and if a lot of them say that at the same time, then you see prices fall.”

Sales of single-family homes in the city are continuing to rise due to the lack of available properties and space constraints on building. Homes are at a record premium of C$204,000 ($200,866) to their high-rise counterparts, according to RealNet data. Since 2009, condo prices have risen steadily 25 percent, compared to a 45 percent spike for low-rises over the same period.

Still the Toronto Real Estate Board, or TREB, forecasts the slowest overall growth since 2008 this year, with average home prices of C$515,000 in 2013, a 3.6 percent advance over 2012. The board forecasts 80,000 total housing sales this year, a 6.5 percent decline from last year and what would be the steepest decline since 2008.

Two Markets

“It’s a tale of two markets when it comes to price growth,” said Jason Mercer, head economist at TREB. “On the low-rise side of the market it’s been extremely tight. There’s a lot of competition out there and lots of inventory. On the condo side, you’ve got quite a bit of supply.”

The boom in some ways has helped regulate the supply coming to market, Lamb said. Developers are all simultaneously building a record number of units, which means there isn’t enough construction equipment such as cranes, or enough workers to go around, delaying sales, construction, and occupancy. Developers saw this coming more than a year ago, Lamb said.

That may not be enough to engineer a soft-landing.

“We had a housing bubble in 1989 that burst, so there’s an example of where the government policy did not create a soft landing,” Craig Alexander, senior economist at Toronto-Dominion Bank (TD), said in a phone interview from Toronto. “Real estate has generally been more volatile than the overall economy and it’s tended to underperform during recessions and then rebound early in the economic recovery.”

Land Demand

Demand for space to develop downtown remains strong. Residential land transactions hit a record C$2.75 billion dollars last year, encompassing all transactions for residential property, land to build residential properties, and for mixed- use purposes, according to RealNet.

Housing starts have also begun to rise again after reaching the lowest level in almost two years in January. They rose for a second month in February to a 184,028 annual rate.

“On lower volume, the housing price is still creeping higher — in the equity market that doesn’t last, it’s a divergence,” said Jeffrey Burchell, fund manager at Aston Hill (AHF) Financial Inc., which manages C$6.7 billion in North America. “You run for the hills when you see that.”

Aston Hill owns shares of InterRent (IIP-U) Real Estate Investment Trust, an Ottawa-based residential multiresidence manager that owns about 4,700 units in Ontario.

“If you see the market going up on low volume, you just sell everything and walk away for a while,” Burchell said. “It’s bizarre that housing prices are still going up but volume’s down because all it does is it takes less to tip it all over.”

To contact the reporter on this story: Katia Dmitrieva in Toronto at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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