Another one of the Big Five banks has published their two cents about the Canadian real estate market. In their report on Global Real Estate Trends, much of Scotiabank’s analysis of Canada’s housing market focused squarely on the situation in Toronto. And they’re much more cautious about the city’s real estate scene than the Bank of Montreal.
Overall, the report forecasts further downside risk to both sales and prices.
The study noted that in Toronto, sales and construction have already shifted significantly lower, with prices also beginning to level out.
“We expect this adjustment process to continue into mid-decade, with downside risk to prices, particularly in the condominium market where supply additions are expected to outpace underlying demand,” said Adrienne Warren, Senior Economist at Scotiabank, in the news release.
The risk factors
- High home prices, tougher mortgage rules and moderate employment and income gains have weakened demand, especially among first-time buyers.
- Toronto resale activity has dropped 10% over the past year though sales have stabilized in the past few months. Sales of new homes have also fallen sharply and the sharp drop in land purchases in the first quarter suggests builders are planning for much slower expansion.
- Lower expected returns on pre-construction condo could put off the investors who dominate this segment of the market.
- Though the current inventory of unsold homes in Toronto is fewer than cities such as Montreal and Vancouver, if investors put these homes on the resale market upon completion, it could put downward pressure on new and resale condo prices over the next several years.
- Even the continued price growth in the in-demand low-rise market continues to grow, affordability is a big challenge and will become more of a risk when interest rates eventually drift higher.
- Increased supply will likely outstrip demand growth over the next few years, dampening the rental gains made on investor-purchased condos.
- Altogether, the bank calls the condo market a “greater risk” because of emerging oversupply conditions that could put deeper pressure on prices over the next several years, especially if the economy continues to underperform.
The saving graces
- The vacancy rate for rental condos in Toronto sits at only 1.2 per cent as of October 2012. Many of the new condos are expected to be added to the rental market and demand should stay robust, thanks to high levels of immigration and weaker homeownership demand.
- Demographic trends in the city favour both the homeownership and rental housing markets over the medium terms since the city is one of the fastest growing regions in the country (it recorded a population increase of 9.2 per cent between 2006-2011).
- Based on household formation rates from 2006-2011, Toronto can absorb close to 40,000 new housing units (rental and ownership) annually.
- Roughly 80% of Toronto population growth comes from international immigration, and new immigrants typically first settle in rental accommodation. After that, roughly two-thirds become homeowners within 5-10 years.