Toronto's Condo Bubble in Seminar

325 project on the market
173 additional towers under construction
15 years of relentlessly rising prices

Toronto braces for a deflating condo bubble

Industry stakeholders stress that the potential for a crash is slight, and most of the talk at the Queen's University seminar was about the strengths of the market. But as construction cranes swiveled outside the windows, the discussion repeatedly circled round to the danger signals that have become impossible to ignore, similar to pilots explaining why they are packing parachutes to take onboard.

Who are you gonna believe . . . me or your lyin' eyes? Wait, is this parachute packed properly?

The developers talked about tighter financing and affordability. The real estate agent wondered about a growing gap between new condos and the resale market. The bankruptcy specialist worried about high supply and few players. The salesman talked about skittish investors and bad press. While it sounds like Canada may be importing the 2008 housing bubble from its neighbors to the south, nearly everyone in the industry argues that Canada is different.

The U.S. is more different from Spain and Ireland than Canada is from the U.S. Did that help? No. Overpaying is overpaying. Loaning in excess to the underlying economic value of a property is a bad idea no matter the structure of the regulations and the culture.

Toronto, with an area population of 5.8 million, accepts about 100,000 new immigrants every year. The bulk of them are from countries where dense urban living is common, and a hard-to-determine number of foreign buyers are helping to prop up the market.

The average immigrant is making 60% of what a native born is making. (source). The median household income in Toronto is $78,000 (source). Assuming the same rate of multiple income households (which would be a generous assumption given cultural differences) then the immigrant household median is $42,000.
Assuming a high downpayment of $20,000 the TD mortgage calculator says the median immigrant household can afford $150,000. Based on the TREB May 2012 stats, there were 18 condo apartments sold under 100k and 272 sold between 100 and 200k. Given the skew is upward (700+ were sold in the next two ranges) we'll say 1/3 of those were under 150k. That means that in the month of May, 100 or so condos were sold in a range affordable to new immigrants.

This is your great salvation? Selling 100 condos a month to new immigrants? This is the biggest delusion running right now in the industry.

Mortgage rates that start at 2.4 percent and don't rise beyond 6.75 percent have boosted affordability, especially compared with pricier single-family homes. The average condo price is C$368,000 (US$378,000) less than half the C$821,000 (US$844,000) it costs to buy a house.

See, again. Just because they look cheap in comparison, they aren't affordable. Not even to the median Canadian-born household in Toronto.

Canderel is focused on inner Toronto and has no plans to change. "I think we will continue to focus on downtown, because when things do change, they probably will fall from the outside in. In our opinion ... the margins will still be ... downtown," Rogowski said.

Does this guy actually look at the stats? The core is degrading the fastest. The others fared better, finally eeking out new highs. This could be a peak market sales mix shift, where demand, locked out of the high end, finds a substitute. Could be timing on projects. Could just be the bubble goes on.

Drost says a huge pipeline of supply is one concern, but believes the big players will weather a cooling in the market. "I think it will slow down but I don't know if we're going to see a lot of failures, frankly," he said, noting he has lived through several corrections and knows the signs. "I think probably the ones you will see or hear about are smaller developers who haven't managed their marketing well, that have maybe cut corners where they shouldn't have, and have not really matched up the project to the target market."

Noted.