Bank of Canada raises alarm on condo overbuilding

Bank of Canada raises alarm on condo overbuilding

Bank of Canada raises alarm on condo overbuilding

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