TORONTO HOUSING BUBBLE - IS IT READY TO BURST? - PART 2

Late last fall, economists and the media were agonizing over whether or not the current buoyant real estate market in Canada was going to continue.  The Toronto market in particular, enjoyed significant record sales and steadily increasing resale and new home prices, particularly on the condominium side.  Since last December, the Toronto housing market in particular has enjoyed record-breaking condominium sales throughout the spring and early summer. According to RealNet Canada Inc., January-June 2011 condominium sales are 39% higher than the first 6 months of 2010.  An astounding 61% of new home sales were condominiums.  The reliance upon investors continues for new condominium sales.  However, a demand for rental housing continues based on the lack of new rental housing in the city and essentially the condominium market is supplying housing to the rental market.   Forecasts from the banking economists as quoted in the Globe & Mail and Toronto Star on Saturday, July 16, 2011, show a variety of price prognostications for the next 2 years being either flat (National Bank, CIBC, RBC, BMO and Scotiabank), a 10.2% correction - TD Bank, or a 25% correction - Capital Economics.  On the other hand, Steven Hurst from RealNet GTA, claims that the trend of hi-rise new home sales in 2011 and solid pricing will continue based on a tight 7 month supply available for sale at the end of April 2011.   Frank Clayton, economic advisor to BILD, in his most recent GTA Residential Market commentary says that there are certain indicators and factors that may lead to a drag on housing demand including limited growth in employment, a drop in net immigration by 17% in Ontario for the past year, and a slippage of manufacturing shipments in Ontario from February to April 2011 after a post-recession high in January 2011.   The real question is whether or not the sizzling condominium market can continue, in the face of European and U.S. economic doom and gloom, coupled with a significant supply of over 34,000 condominium apartments under construction according to CMHC, plus an additional 19,339 units sold but not started (RealNet) at the end of May 2011.  My sense is that after a 15 year exhilarating run in the new home and particularly, the hi-rise market, the GTA has to be due for a least a breather.  If the Bank of Canada looks to increase interest rates in the fall (as suggested by Mark Carney last week), and the news out of the U.S. and Europe continues to be negative, a slowdown in sales is likely.   Another factor is the continued increase in pricing of new condominiums in the GTA, which coupled with an increase in interest rates, could make affordability problematic.  Prices are up 8.3% from last June for high-rise (and 12.6% for low-rise) (RealNet).  In the meantime, however, potential land sites are seeing record prices and record interest from developers in Toronto.  Some sites will always do well.  It will be the marginal sites that will suffer as the market possibly softens in the next 12-18 months.   Stay tuned.