Should investors avoid condos?

Should investors avoid condos?

Should investors avoid condos? Both the Globe and Mail and CBC recently sparked worry among Torontonians and investors across the country with their respective coverage of a Royal Bank of Canada report, released in late May. 

“Canada’s biggest bank has sounded the alarm about overbuilding in Toronto’s condo boom, saying the level of new units coming online, coupled with existing ones that are yet to sell, have the market in ‘high risk’ territory,” the CBC reported.

The Globe countered with its own (similar) take. “Royal Bank of Canada economists are fretting over the condo construction boom,” wrote Michael Babad in the paper’s Business Briefing. “They’re flagging other issues as well, notably that of housing affordability in Vancouver and Toronto.”

RBC did indeed say there is a risk of condo overbuilding, particularly in Toronto. “There were 5.7 multi-unit dwellings per 1,000 population under construction in Canada in Q1/16, or just shy of the decadeshigh of 5.8 units reached during 2014. This level is well into the ‘high risk zone’ (4.5 units or higher),” RBC economists Craig Wright and Robert Hogue wrote in their report, entitled “Canadian Housing Health Check.”

However, the pair also claimed the condo market has heretofore been operating at a “healthy” level.

“Healthy condo absorption has mitigated risks that arose following a spike in condo completions in early 2015,” they wrote. “According to the Toronto Real
Estate Board, condo rental activity has surged in recent years. “Yet strong supply has been met with equally strong rental demand,” the pair continued.

“So far, there is little evidence that condo investors who rent their units have overestimated rental demand.” Still, there is a chance that demand will
peter out and lead to an excess of units.

“The prospects for high levels of condo completions in the period ahead in markets such as Toronto, Montreal and Calgary maintain above-average absorption risks,” the Wright and Hogue wrote.