Photo: City of Toronto Archives
For Toronto’s roaring housing market, it won’t be the late-’80s all over again — not according to the country’s national housing agency, anyway.
A new Canada Mortgage and Housing Corporation (CMHC) report, published Tuesday, sets out how the city’s housing market today is different compared to the late-1980s, a time when the agency suggests speculation led developers to simply build too many condo units.
Homebuilders now generally wait to sell a higher share of a condo project’s units before breaking ground than they did in the latter part of the 1980s — when it is widely acknowledged that Toronto real estate was in a bubble — according to the CMHC’s GTA Housing Market Insight report.
“Anecdotal evidence suggests that many of these projects started construction with low pre-construction sales thresholds (partly in order to speed up construction and developers wagering on guaranteed sales at the point of completion,” writes Dana Senagama, CMHC’s principal of GTA market analysis, in the report.
“As the economy turned and demand for housing softened, there were fewer buyers for these units that were now abundant in the market. The ensuing result was falling prices and an ‘exodus’ from the condo market,” she continues in the report, which notes “any unit started but not sold is built on speculation.”
On average, from the the start of 2014 to the end of 2015, 79 per cent of condos didn’t enter the construction phase until 70 per cent of their units had been sold, according to the report, which only looks at recent data.
That’s thanks to more stringent lending practices taken up in the past 10 years by those who bankroll residential developments, CMHC explains. It is common for a lender to require 60-80 per cent sales before financing construction.
“In general, our research shows that the majority of builders wait until a higher sales threshold is reached prior to commencing construction thus mitigating risks associated with overbuilding,” says the report.
In the report, CMHC also looked at how many condo units have been built yet remain unsold in the GTA. For the first quarter of this year, these units numbered 1,373, while contractors worked away on 43,860 more condos.
A large share of units that remain unsold continue to be spread across a small number of overall developments. For instance, CMHC notes that 40 per cent of unsold units could be found in 10 per cent of the condo buildings that were completed in 2016’s first quarter, and Benjamin Tal, a CIBC economist, highlighted this trend as early as late last year.
These unsold but ready-to-move-in units are most highly concentrated in a few areas: CityPlace, around Yonge and Bloor Streets, and the King West/Liberty Village area, according to CMHC.
The GTA’s absorption rate, which measures the share of completed condos that buyers have already snapped up, averaged 94 per cent in the first quarter of this year.
“A tight resale condo market and strong rental demand have helped to absorb some of the completed and unsold units,” says the report. “The current inventory level is low compared to the highs witnessed during the early 1990s and has eased from a slight increase in 2015.”