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Toronto’s Epic Condo Bubble Suddenly Turns into Condo Glut
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
The high-rise construction boom in Toronto has been evident for a while. It has been motivated by sky-high prices. In May, prices in Toronto rose another 5% from a year ago. For all types of homes, prices are now 42% higher than at the crazy peak of the prior bubble! And if people can’t afford to buy any longer, even with super-low interest rates, well, they can step down to a fancily equipped micro-condo, or more commonly called shoebox condo, where the dining table might fold into a bed.
But suddenly we get a nerve-wracking disturbance in this beautiful picture:
National Bank Financial said in a note to its clients that, based on data from Canada Mortgage and Housing Corp., the number of completed but unsold condos in Toronto spiked in May to 2,837, an all-time record high.
So the monthly data is choppy and may not be very reliable. It’s an estimate, and estimating new and unsold condos isn’t that easy. But the magnitude of this spike far exceeds the monthly ups and downs in recent years, and exceeds even those dizzying spikes in the late 1980s and early 1990s when the Toronto condo market went completely haywire.
But it wasn’t just one month. The count had edged up in April to hit 2,038 after having already spiked beautifully in March to the highest level since the early 1990s. This is what this phenomenon looks like (data from National Bank):
The report blamed the absorption rate, a measure of condos that have been completed during the month and were either sold or rented. It plunged to 69.5%. But don’t worry. “It would be premature to think that the absorption rate will stay low, causing persisting accelerated increases in the number of vacant completed condos,” the note said to mollify client anxieties.
Such a spike in unsold units and such a plunge in the absorption rate would normally get folks to fret about oversupply, future pricing pressures, and other industry nightmares. Condo construction booms have a nasty tendency to flip suddenly into busts, and then no one can turn off the spigot of new units coming on the market because high-rise condos take years to plan and build, and they just keep coming.
But don’t worry. Business News Network, in reporting on this spike, pointed out that National Bank senior economist Marc Pinsonneault “says there is no cause for concern at this point about a future condo glut driving down prices.”
This is what he wrote in the note:
To be sure, the situation deserves monitoring. But one month does not make a trend. According to more comprehensive data from Realnet (it includes presales and condos under construction as well as completed condos), the number of unsold new condos has been trending down since the second half of 2014.
The gurus at BNN came out swinging to soothe our frayed nerves over a possible condo glut. There were “lots of reasons” to thing that the terrible absorption rate would not persist, they said. Based “on long-term fundamentals, everything looks like it’s in balance and fine.” In fact, it “looks like a well-behaved Toronto condo market.”
How well-behaved?
Canada Mortgage and Housing Corporation (CMHC), an entity of the Canadian government, just released the housing starts data. In the Toronto Census Metropolitan Area, starts of single-family detached homes edged up 6% year-to-date through May to 3,121 units. Starts of “all others,” a category that consists largely of condos in Toronto, jumped 29% year-to-date to 13,384 units. But in May alone, compared to last year, “all others” soared 80%!
That’s the true signature of a condo construction boom. Now all we need for this condo market to remain “well-behaved,” despite soaring starts and unsold inventories, is for a lot of buyers with a lot of money to emerge very quickly from China or wherever and “absorb” these units and all the units still coming on the market. Or else, this is going to turn into one epic condo glut.
This is the Canadian real estate environment where millennials and immigrants are “plankton” in the “food chain” for “big wales and sharks.” Read… Canadian Mortgage Insurer Tells US Hedge Funds Why Canada’s Housing Bubble Is Immortal. Hilarity Ensues
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Maybe they can attract some Mexican illegals to move up there did i say that.
5% - That aint nothing. In Auckland (New Zealand) resedential house prives went up 16.2 % in a year and the Reserve Bank of NZ just dropped interest rates because inflation was too low? There is also no restrictions on foreign investors in the New Zealand market.
Wolf great article. Housing boom to bust for sure. Maybe think of using another word to describe beautiful.
:)
Why would anyone spend that kind of money to live in a cloudy cold place, when for less you can live it up in Costa Rica or Nicaragua, or other Central American countries.
Abandoned condos in Toronto - and half sold condos leave the existing owners with an unlimited liability to cover costs.
And since foreigners own most of these condos, when the leave (default), the liability to the Canadian banking oligopoly get fatter and fatter.
Keep us informed Tylers - this is going to get entertaining. A shout out to the Toronto urban planners - nice "fuck off job" they've done.
Have heard some nightmare stories coming out of Alberta of late.
That stands oit to me as there is actual equity in that province in the form of a huge amount of energy and productive land.
Weather was incredibly warm with basically no winter out that way this year so I'm told.
If the Calagary market is getting hammered that sounds like bad news for Toronto...let alone Chicago.
We'll see about the entire State of Michigan I guess.
Low oil price and a newly elected socialist provincial govt that's anti-big business -- what's not to like?
We threw out the bankster.
I would rather share my wealth with my neighbors than give it to the banksters.
Harper is next to be thrown out.
All they have to do to keep their pie-in-the-sky housing market wetdreams live on is let mainland chinese back in. I'm sure we can find 2,837 Chinese with some of that extra counterfeit money they call the yuan to prop up that bubble. Seems to be working in Hong Kong.
"Here comes your nineteenth nervous breakdown---"; The Rolling Stones. It's gonna be epic. The Frozen North's very own "Pop the Bubble" game. "Crash"; 'what was that?"; the sound of your real-estate market imploding. Oh.
I'm not chartist,
but danged if that don't look like a trend.
Which banks have given the construction loans on the latest 80% y/o/y jump in construction starts?
They can't bundle mortgages or liens in Canada, I believe. So it would be one or more of their big banks that are on the hook. Does their CMHC cover construction loans? It wouldn't make sense if they did. That absorption rate is low.
So that's an awful lot of spec. inventory (glut) being built with cheapest loans ever. But if they don't sell their product for lack of new buyers, the banks are holding the bags as the developers are walking away from the sites.
The proximity of Toronto to Detroit is surely a selling point.
The proximity of Toronto to Detroit is surely a selling point.
This is what you get in The D for 159K.
6 Bedroom full brick with basement.
2,922 Sq Ft
3 Full, 2 Half Bath
A few pics if interested ->
http://www.realtor.com/realestateandhomes-detail/2455-Chicago-Blvd_Detro...
See below and "no problem selling Manhattan for a million a square foot."
Does anyone else remember when closet sized apartments in Tokyo were selling for $1mn before the collapse?
Definetely; also it was anounced by "serious people", that one block in downtown Tokyo was valued at more than Manhatten Island; Uh-huh. Yees. Well, not anymore, baby sister. Now it's worth shit.
Recall the Tokyo Imperial Palace….
“During the height of the 1980s Japanese property bubble, the palace grounds were valued by some as more than the value of all the real estate in the state of California”
Here's some irony for you:
Local governments in some parts of rural Japan are offering low rent housing to anyone willing to maintain the property, which would otherwise be abandoned due to the declining population.
Japan could solve its rural demographic problem literally overnight by opening up immigration to Chinese, Korean, Indian and Philipino farmers. Free land is a big incentive for people who have none, and there's plenty of viable rice growing areas that are dying for lack of people to farm.
Xenophbia is the main obstacle here - a fact they will have to confront at some point if they wish to maintain their position in the world.
"---if they wish to maintain their position in the world" Or any position at all, except Doggy Style.
This is what $180,000 buys you about 30 minutes west of toronto. It may be a walk-In closet but at least the fees are cheap...ish.
1 Parking Space is including in the purchase price
1 Locker is included in the purchase price
Free Lawyer Review
Capped Development Charges
Deposit Structure
1st with agreement - $5000.00
2nd 30 days from 1st deposit – Balance to 5%
3rd 90 days from 1st deposit – 5%
4th 270 days from 1st deposit – 5%
Project Summary
Development Name: Senses Condominiums
Address: Kerr Street & Shepherd Road, Oakville, ON L6K
Developer(s): Empire Communities
Unit Sizes: From 346 Sq Ft. to 1250 Sq Ft.
Price Range: From $179,990
Maintenance Fees: $0.50/sq. ft. Includes: Gas, Common Element Expenses & Building Insurance
Occupancy Date: Oct 2016
Free lawyer fees...we will have our attorney look at it for ya ;-) what a hoot
WOW! 360 square feet. That's room for me, my dog (Great Dane) and a piano. We'll share the same dishes of course.
346 sf?
My master bed, bath and closet are bigger than that.
Good lord, people are dumb.
Soon to be mandated -- just one piece of modern social engineering. (listen for the public shaming of people who have 'too much space')
"(In mainland China, banksters not only do perp walks but are routinely put before firing squads.)" Link to proof please...I'd like to read more about such common sense.
A thought about real estate bubbles: buying one's first home is a rite of passage; we only figure out later that we're also agreeing to pay the salaries and benefits of everyone working in our taxing districts up to and including at the state level even thoough we may not use (or get) the services they supposedly provide. It's a ponzi. For those who predate Boomers and for Boomers, the ponzi is collapsing.
The article is very informative, but I'm not liking the insinuation that BNN is cowtowing to the industry.
I'm a frequent watcher and I've always found them to be FAR more objective than any media from US.
Many times they've call bullsh*t on their guests. (in a most polite fashion)
'industry is in denial' so is harper.
Property developers are always blind greedy pigs in cohoots with politicians.
Seen it so many times, overbuild to a glut.
“There is strong demand in this country and there will always be,” Levings said. “Why? Simply because of our immigration policy..." - Stuart Levings, CEO of Genworth MI Canada
This IS the primary reason (imo) why so many Democrats and Republicans alike publicly support relaxed immigration policies in the US. It is all about consumption. US corporations want more consumers, and they own both parties. Be it Hillary or Jeb, look for support for relaxed immigration policies... and US corporations don't care too much what you think about it.
“There is strong demand in this country and there will always be,” Levings said. “Why? Simply because of our immigration policy..." - Stuart Levings, CEO of Genworth MI Canada
I'm convinced the Canadian govt. has a secret pact with Japan not to allow immigration from there. My wife's niece tried for over two years to get landed, but no dice. You can bring in a parent, spouse or child under the family reunification clause, but not a niece?
This is an healthy, educated woman who speaks fluent English, and who already has a place to live (with us). I even offered to post a $100K surety bond, but still no deal.
So, what's up with that?
A few more patient years of Ontario's insane government, and Toronto's city council. and it will be time to buy.
Yep. for 1/3 the price.
Easier for them to crank up a program to Attract more Foreign Investors/Immigrants.
Change is hard.
Because this time it's different. Really. I swear on my mother's grave, and pinky promise.
/sarc off.
The only genuine demand for housing in Canada comes from rich Chinese paying cash for bug-outs in Vancouver and Toronto, insurance against the stock market blowing up and/or getting into trouble their money can't get them out of. (In mainland China, banksters not only do perp walks but are routinely put before firing squads.)
The rest of the market has nothing but interest rates that would be unheard of in a free market to keep it propped up. Even the Bank of Canada admit overvaluation is a good 20 percent. The truth is probably closer to 40 per cent.
Do not buy a house in Canada. If you have, sell while you still can. Take a tip from the Big Five. Not one of them still owns their own HQ.
It's not necessary to sell, if you like living in it; just don't start believing the pricing and using it for an ATM and you'll be alright.
"The only genuine demand for housing in Canada comes from rich Chinese paying cash for bug-outs in Vancouver and Toronto"
I can't speak for Toronto, but most of the Chinese in our area (west side Vancouver) are either regular immigrants, or second generation Canadians (1). There's one family on our block where the husband commutes between here and Hong Kong while the wife and kids stay home. They rent out the lower part of the house, presumably to make the mortgage payments. No bankers on our street.
What people overlook here is that wealth in China is often accumulated over generations. Further, Chinese tend to live at home until they complete their education and get married, after which they support their parents, who in turn bequeath their wealth to their sons and daughters. Indians do that as well whereas we stopped doing that decades ago and now each new family is basically starting from scratch.
Sorry, but I just don't see these alleged bad guys everyone's talking about. I'm sure there's some, but IMO, they are a small percentage of the total. Most of the Chinese I know are doing the same thing my parents did in the 60's when they left Britain: looking for a better place to settle down and raise a family.
I have no problem with these people moving here, in fact, apart from their poor driving skills (2) they are a welcome addition. My problem is with the Canadian government, which allows non-resident ownership of real estate. In effect, they are enabling wealthy Chinese to expoit a genuine emmigration trend by buying ahead of the herd. This is the very thing most Chinese coming here seek to avoid, i.e. economic exploitation by the uber-rich. Remove that factor and prices will still be high, but at least it will be natural demand and not blatant extortion enabled by a government that's either complicit, or too stupid to recognize the effect (not sure yet which it is).
(1) the pastor of our local church puts on a block party every year, so I've met most of our neighbors, which is how I know. Incidentally, a good number of Chinese in Canada are Christians, or become so after their arrival. Doesn't matter to me, but some here might care, so I just thought I'd mention it.
(2) The Chinese are well aware of their reputation for bad driving and even have a sense of humor about it. In BC, you have to have a letter "N" for new driver, or a letter "L" for learner displayed on the rear of your vehicle. A while back Chinese kids starting putting a letter "C" for Chinese on the back of their cars. Hilarity ensued. Also, you can easily spot the Chinese driver by the stuffed animals in the back window, in fact I put stuffed animals in my wife's back window just so people would give her a wide berth.
Chinese driving...there is a time in the brain's development for everything whether it reading, walking, driving, learning golf. The Chinese I know learned to drive in their mid 30's. That would be like trying to teach a feral 15 year old how to read. Those peasants will never "get it" and are a freaking hazard on the road. I have know some to come to a complete stop on the expressway if they become confused. They don't even understand the concept of getting in a line and waiting their turn when on foot. Put them behind a wheel of a 302 hp MB? Holy shit.
Right Fred -- New crime in Canada -- DWO (Driving While Oriental)
That will evaporate once Canada signs an extradition treaty with China.
I'm not aware of any movement in that direction. Canada won't extradite to nations that have the death penalty where the accused may be facing same. I don't see that changing, nor do I see China eliminating that penalty, which IMO they should.
Apart from the problem of false accusation and political motives, the death penalty is counter-productive. We all die eventually, so why give the criminal an easy out? A lifetime of hard labor, (building roads, clearing brush, cleaning up toxic waste etc) seems more appropriate. Putting them to use repairing at least some of the damage they've caused seems like a better option than just offing them after a lengthy and very costly appeals process.
I live in a suburb outside Toronto. People in Canada, for the most part, think that we will never have our properties decline in value.
They are in for a big surprise.
They'll destroy the CDN $ before they let prices fall, too many massive pension funds invested in real estate. Canadians are a peacefull people but if you screw with their retirement and what they think they'll be getting, look out. Especially the over paid lazy public sector workers, maybe that's why Harper is doing everything in his power to lose the next election.
Yup. Just like anyone who believes anyting "never" has a big decline in price; because everything does, sooner or later.
An average "investor": The way I calculate this ongoing trend, my 1700sq ft will be worth $8.7 million in 10 years.
It's okay as a joke, just don't start believing in it; or get used to the idea that it may go through a 600K price point on the way to the multi-millions. I could never understand speculating in houses, I thought you were supposed to live in them. Hopelessly old-fashioned, I suppose.
In 10 years, $8.7mln should be able to purchase a bag of groceries and a tank of gas.
Enjoy!!
That too. Yeah, inflation doesn't leave you much to celebrate about. Unless you own Silver, of course.