Bank of Canada raises alarm on condo overbuilding

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Those constantly multiplying construction cranes marring the downtown Toronto office window view could be harbingers of “severe economic shocks” for Canadians, according to the latest report from the Bank of Canada which raised warnings of overbuilding in the condo sector.

“In the current context, a specific concern is that the total number of housing units under construction has been increasing and is now well above its historical average relative to the population,” according to the bank’s Financial Systems Review – December 2012 report. “If the upcoming supply units are not absorbed by demand as they are completed over the next 18 to 36 months, the supply-demand imbalance will become more pronounced, increasing the risk of a sudden correction in prices.”

Some brokers and realtors, at least in Toronto, believe the condo market has peaked. In August, there was a 10 per cent slip in Condo sales which forced an overall decline of 1.5 per cent in Canada’s hottest market. Condo sales fell to 1,753 for July with the overall sale of 7,570 home that month, compared to 7683 that sold a year earlier, according to the Toronto Real Estate Board.

But according to the BOC, the over building is mainly occurring in the multi-unit dwelling market especially in major metropolitan areas. In the scenario it painted, the bank warned, price corrections in this particular segment may pull down house prices in general creating a domino effect that would also cause jobs to tumble and household spending to slacken.

“This would likely lead to a decline in housing activity, adversely affect household incomes and employment, as well as confidence and household net worth, which would in turn reduce household spending,” the report said.

Three developments in the sector need monitoring according to the Bank of Canada:

  • Since June 2011 the number of unsold high-rise units in the pre-construction stage has risen from 7,000 to 14,000. Unsold units under construction have increased from 5,000 in the beginning of 2012 to almost 7,000
  • Over the past year prices of condos have flattened and many builders have started phasing projects to address overbuilding
  • The average square-footage of sold units has been shrinking since 2010

 

  • Ron Price on 08/12/2012 5:52:55 AM

    Finally overbuilding condos has been sited as the 'real' problem with the real estate market. My view is that the Feds were overzealous with four rounds of mortgage rule tightening, taking a sludge hammer to the overall market, not just new construction, not just investors, but first time buyers, self employees and all but killing high ratio refinancing. The result, private money is now back with a vengeance as the only solution for many.
    If the Feds had addressed the new condo sector only by putting in new measures to curtain or prevent 'speculation' by investors, and perhaps even gone so far as to allow owner occupancy only, the whole real estate market would not have been adversely and unnecessarily affected.
    Now it may be too late to address the condo problem, and no matter what the Feds do, I believe the writer of the article may have hit the nail on the head...no pun intended, in that a domino affect may well occur and damage the overall real estate market and the economy.
    I hope I live long enough to see the day where our federal government policy makers address micro problems with micro solutions, not micro with macro.

  • Ed Novak, Real Estate Broker on 08/12/2012 6:14:20 AM

    When there was a ridiculous over-building of subdivisions, it was OK, but since its condos, its not. Total number of housing units (condos plus houses) hasn't changed all that much. The lack of buildable land is shrinking and becoming exceedingly expensive. Therefore, there is a natural tendency for builders to go up and for square footages to shrink. In the ever tighter and more congested cities, people will have to learn to live with less. Look at Europe and the far east. That is also becoming our reality. So, let's stop making up reasons to create panic and publishing negative news in order to have a self-fullfiling prophecy.

    In as far as the prices of new condos going up, let's not blame the builders. Everyone realizes that the land and construction costs have gone up, but very few people acknowledge that the local governments have had a huge impact as well. The development charges, permits, appeals, taxes (in liu of green space), etc have driven the prices up more than anything else. Let's thank our politicians for that.

    Yes, the number of condo sales have gone down and the prices are flat. What would you expect from constantly negative media? The money is still cheap. Rents (downtown Toronto) are up and there is a shortage of decent condos to rent. I say, give it a few months, and assuming that interest rates remain relatively low, the public will break through the mental barrier of what is now considered as "high prices" and will go back to buying, selling and investing. Mark my words.

  • Omer Quenneville on 11/12/2012 5:08:27 AM

    Unemployment is down and immigration is high. From what i hear things are still good in the suburbs, Perhaps this has more to do with the land transfer tax, poor city planning and a shift in the market to the outer areas.

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