Market Forecast

Too Many Condos? Not Necessarily, Says RBC.

Canadian condominium construction is strong, but not necessarily excessive, since new units are filling a gap by creating much needed rental stock, says a report by the Royal Bank of Canada.

“Concerns have been raised about the growing number of investors fuelling the growth in condo sales in recent years,” said Robert Hogue, a senior economist with RBC in a report Thursday. He says condominium units fill a need in the rental market because few apartment buildings have been initiated in the last two decades.

RBC estimates about 20 per cent of all condominiums are rented. In recent years, that figure could be higher, since market research firm Urbanation Inc. estimates that 45 to 60 per cent of all new units are being purchased by investors. Some of those investors will rent their property out, while others will sell the unit on closing.

Vacancy rates in the Toronto market dropped sharply to 1.6 per cent in April compared with 2.7 per cent a year earlier, according to the Canada Mortgage and Housing Corporation.

Condominium sales have been on a tear in the Toronto area, representing the largest market in North America. In the GTA alone, there are 37,700 units currently under construction. Thanks largely to condos, sales of new homes were also up by 53 per cent in June, compared with the same month a year earlier of 3,050, according to figures released by RealNet Canada Inc. Tuesday. Nearly two thirds of all sales in June were condos, up from the historical norm of about 40 per cent.

However, Hogue said while the number of completed units awaiting occupancy is at the highest level since the 1990s, the percentage of unoccupied units are still below long-term averages.

Canadian Home Resale Market Forecast Update

Still heading toward moderation

The Canadian housing market is in transition to a more moderate and sustainable pace of activity following a period of exceptional growth during the better part of the last decade. This transition has been punctuated by global events (recession and financial crisis) and policy changes (sharp drop in interest rates, three rounds of mortgage lending rule modifications, and the introduction of the HST in Ontario and British Columbia) that produced tremendous volatility since 2008. Our view is that less turbulent economic and policy environments will support a smoother process going forward. The main policy shift will be one toward progressively higher interest rates, which will cool demand but not deep-freeze it. We expect resales in Canada to grow by 0.9% in 2011 and remain unchanged in 2012; and home prices to increase by 4.4% and 0.4%, respectively. Such results would mark a significant slowing relative to the performance during the 2002-2008 period.

There will be perfectly offsetting forces are at play…

Beyond the near-term policy-induced movements in home resales, demand for housing in Canada will be shaped by nearly perfectly offsetting forces. On the upside, sustained growth in the economy (our call for Canada’s real GDP growth is 3.2% in 2011 and 3.1% in 2012) will boost demand via stronger employment and family incomes; and continued net-migration (assumed to be in the vicinity of the recent 250,000 level) will keep demographic fundamentals supportive. On the downside, expected increases in interest rates (we forecast the Bank of Canada to lift the overnight rate by 75 basis points by the end of 2011 and another 125 points next year) will dampen demand by raising the proportion of household budgets spent on servicing their elevated debt and by eroding housing affordability, which has recently shown signs of strain. We believe that the net effect of these forces will be close to nil, thereby leaving resales activity largely flat overall.

At the provincial level, we forecast the Alberta market to post the strongest growth in existing home sales this year and next, yet the effect on prices will be felt only next year, as property values in the province are expected to appreciate marginally this year. At the other end of the spectrum, we forecast home resales to decline modestly in Quebec in both 2011 and 2012, while prices will continue to rise at one of the faster rates this year among provinces before levelling off in 2012. The perplexing developments in the B.C. market in the past several months—whereby home prices have surged in segments of the Vancouver area market despite slower resales—are expected to be partly reversed in the coming year, making British Columbia the only province experiencing a price decline (on an annual basis) in our forecast for 2012.

We expect activity in Ontario and the Atlantic Provinces to be mainly flat in 2011 relative to 2010 with some weakness emerging next year. Ontario resales have been quite robust so far in this year although they moderated just a tad in the spring. We believe that rising interest rates will weigh on the province’s first-time homebuyers (who are more vulnerable to Ontario’s elevated home prices than buyers in most other provinces) starting later this year. We project that 195,300 existing housing units will be sold in Ontario in 2011, little changed from 195,600 units in 2010, but that the tally will edge lower to 193,700 units in 2012, the second-lowest level since 2003. In the Atlantic Provinces, we expect resales to rise marginally to 22,700 units in 2011 from 22,500 units in 2010 before softening a little to 22,400 units in 2012.

Source: RBC Economics Research


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