Condo Bubble – Part 3

Events like civil war in Syria, social unrest and a move toward dictatorship in Egypt, wars in the Gaza Strip, the teacher strikes in Ontario and a lack of a Premier in Ontario, all seem to be relatively minor news stories in the face of the “condo bubble” controversy that continues to rage in Toronto.

Jim Flaherty is quite pleased with himself these days in light of his successful “cooling” of the marketplace with the new measures to limit CMHC insurance and tighten the lending criteria for the banking industry on residential mortgages.  The fact that the market in Toronto and elsewhere in Canada was already cooling before he decided to jump in with both feet, appears to have gone unnoticed.

There is no question that the housing market and the condominium market in particular has slowed down somewhat in Toronto, as has the low-rise market as well.  In recent weeks, there have been a number of forums and articles written relating to the condominium market which have cast some interesting viewpoints on where the market is going.  Two weeks ago at the Real Estate Forum, a lively debate was held with Benjamin Tal, Managing Director & Deputy Chief Economist, CIBC World Markets Inc., David Madani, Economist, Canada, Capital Economics (N.A.) Ltd., and Gabriel Leung, Vice President, Development, Concord Adex Corp., chaired by George Carras, President, RealNet Canada Inc.

Benjamin, in his most entertaining and outspoken style, made it clear that he does not feel that a crash is coming or that a bubble is going to be burst.  He said that over the last few months, that he is not as concerned with the statistics relating to consumer debt and the number of cranes in Toronto.  He likens statistics to a woman in a bikini.  Certainly, very revealing, but the most interesting bits are hidden away. 

He felt a minor correction of 5-10% could happen in the next year which would be good for the industry while it takes a breather and eliminates uneconomic projects. 

He compared Canada’s situation to that of the United States when the recession started in the mid-2000’s.  He felt that none of the key drivers in the U.S. which brought the housing market down such as the high delinquency rate, significant sub-mortgage prime percentage of the marketplace, the lack of recourse on debt, and the tax deductibility which is driving speculation are prevalent in Canada.  He did caution that the current low interest rate environment will not continue to drive the market as it has done in the past.  He compared the lengthy low interest environment to a relationship.  At the beginning, both the man and woman are excited and can hardly breathe.  After 2 years in the relationship, if they can’t breathe, it is probably asthma.

David Madani, took a much darker pessimistic view of the real estate market.  Notwithstanding the comments of Benjamin Tal, he felt that there were similar certain similarities in the current Canadian situation to the U.S. market with the high debt, unsustainable prices and oversupply.  He felt the more severe correction was in the offing.

Gabriel Leung, the one developer on the panel, brought some reality to the proceedings.  He indicated that the Concord Adex projects in CityPlace and North York were proceeding well and selling well.  Clearly, with the softening in the marketplace, caution has to be exercised on new acquisitions and the high prices that had been paid to date.  He felt overall, that the market would continue to be sustainable, as evidenced by the very strong rental market at CityPlace.

I will be writing over the next few days about George Carras’ analysis of the marketplace in the context of a longer term view as opposed to a year-to-year comparison which all the newspapers take.  As well, I will update you on Brad Lamb’s assessment of the downtown condominium market at the recent MCAP market update.  Stay tuned.