Toronto not in condo bubble: RBC

Fears of a condo bubble in Canada’s biggest housing market are overblown, according to a new report from the Royal Bank of Canada.

RBC’s senior economist Robert Hogue said in the report Tuesday that demand in Toronto is in line with supply, contradicting claims that a condo bubble has emerged in the city.

He said that Toronto’s condo building frenzy over the last few years is mainly a response to the steep drop in new single-family homes being built. Efforts by the Ontario government to stem urban sprawl in the GTA is one of the reasons why developers are being forced to build laterally, said Mr. Hogue.

Mr. Hogue added that he does not expect supply to outpace demand over the next few years. He also expects that some projects currently in the construction pipeline could be delayed or cancelled.

“Possible reasons for such delays or cancellations include production capacity constraints on the part of builders, the inability of projects to reach sales thresholds necessary to move forward with construction, and tighter lending standards for builders,” he said.

While Mr. Hogue doesn’t see evidence of a bubble, he nevertheless expects housing prices in Toronto to cool over the next year, forecasting 2-7% decrease by mid-2013. One of the factors for the potential pullback are new mortgage rules introduced by Finance Minister Jim Flaherty last month, which, among other things, reduced maximum amortization from 30 years to 25 years.

Mr. Hogue’s report also looked at the issue of investors buying condos in Toronto, something that has been a concern in the past. He concluded that worries about investors artificially inflating condo prices in Toronto are “overblown.”

Mr. Hogue said that a recent sample of projects shows that investors (e.g. buyers who purchase condos but don’t live in them) constitute anywhere from 15-40% of sold condo units. But he points out that the most recent data from the Canada Mortgage and Housing Corp., released last fall, shows that most of those investors are not flipping their condos and are most likely using them as income supplements by renting them out.

“Their involvement has not inflated overall housing demand beyond household formation and may contribute only to a modest overshoot in the coming years if demographics weaken,” he said.

Mr. Hogue does warn, however, that there is a risk that a flood of investors could create an imbalance in Toronto’s condo market. He said that if investors overwhelmingly buy single-bedroom units, for instance, it could skew demand and result in a bubble.