Summer Swoon – Real Estate Market Update

News of the summer sales has been across all of the headlines over the last couple of weeks.  The Globe & Mail dubbed the August sales numbers as “The August Chill”.  Robert Hogue, Senior Economist of RBC, put out a report on September 17, 2012, reviewing the resale market numbers for July and August 2012 and suggested that the impact of the changes to CMHC mortgage insurance rules were having the impact that Jim Flaherty had sought – a cooling of the marketplace. 

New high-rise sales in July and August averaged 2,083, 17% below the previous 13-year average of 2,495 units.  A record low of 1,478 units over the same timeframe were sold in the low-rise marketplace.

George Carras from RealNet analyzes these numbers and puts a different spin on the reason for the poor 2012 market from a new home perspective.  Firstly, the number of new openings on the condominium side was dramatically down in the summertime – 77% fewer openings than in 2011.  Because new openings generally account for between 30% and 50% of average monthly sales, this significant reduction in new openings would certainly have impacted greatly on sales numbers.  As well, on the low-rise side, inventories were dramatically low with only 6,000 homes being available and only an additional 1,424 units being added to the summer marketplace.  Coupled with an average new home purchase price of $609,000.00 for low-rise, being a 12.7% increase over the August 2011 numbers, low-rise homes are pricing themselves out of the marketplace with very little supply.  No wonder that the average number of sales this summer dropped by 58% from 3,500 sales to 1,478 sales.

Yes, it is certainly true that the new mortgage insurance rules are having an impact on first-time buyers entering the marketplace, primarily on the low-rise side.  It is also true that investors are no longer major players in the marketplace.  Other factors are having a significant impact on new homes sales.

1. On the low-rise side, the lack of land is pushing up land costs and dramatically increasing costs of houses for first-time and move-up buyers.  Townhouses used to be the entry level type of house for first-time buyers.  In the GTA, these type of houses for less than the mid-$500,000’s don’t exist.  Is that an entry level house?
2. Because of the change in investor appetites, condominiums need to be designed and marketed more to end users.  Size and design of units and location of a project will have a significant impact.  We are moving to a market we had 6 or 7 years ago where a large project of 300 or more units could take 1 year to 18 months to reach the 60% or 70% pre-sales required for financing. 
3. The 28,000 condominium units sold in 2012 was clearly out of line from a historical perspective.  Bringing the number back to 14,000-16,000 units per year is a healthy and a normal marketplace which can be absorbed by the construction industry.  That industry is not capable of putting out 30,000 units in a year.

The fact still remains that 80,000-100,000 new immigrants to the GTA arrive every year and need to be housed either in rental or owner occupied homes.  New condominiums are the key source of rental housing and will continue to be that way.  There will be continued demand for housing and the only question will be affordability.  With development charges, parkland dedication fees and a myriad of other charges escalating dramatically and mortgage insurance rules becoming tighter, governments are potentially creating their own housing crisis.