TD expects condos to decline by about 8% during the next two years but expects detached homes to continue appreciating at a more modest 2 to 3% rate. Apparently the SFH market segment is well supported by fundamentals yet the banks stop short of naming what those fundamentals are.
However the report does acknowledge that the cost of a detached home in Toronto is high ($718,00) and largely out of reach for a family earning the average income in Toronto. So how is it well supported by fundamentals again?
Below is my summary of the report followed by my comments.
Key Points from TD's report:
- Market for detached homes remains tight, keeping average resale home price growth in the GTA near 9% (Y/Y) in February 2014, further igniting fears of a bubble.
- Sales in the new housing market have plunged by about 30% from their peak in 2011. In contrast, resale activity was down only 3% from the same period. Low listings was the most important culprit behind the upward pressure on resale prices.
- Scarcity of detached homes drives their price substantially up.
- For every three condos built, only one detached home is constructed in the GTA.
- 70,000 condos are expected to be completed over 2014 & 2015.
- 26% of condos in the GTA are used for rental purposes.
- It is hard for new condos to compete with older ones which are cheaper and larger.
- The average size of condo peaked in 2005 at 925 square feet. In 2014 the average size was 798.
- The average condo cost $300 per square foot in 2004. A condo under construction in Dec 2013 was priced at $545 per square foot.
- Resale condos are cheaper by almost $100,000.
- The cost of carrying an average priced condo has been exceeding the rent that can be earned on it.
- In general local markets with higher concentration of condo towers are expected to under perform areas where there are mainly low rise homes.
I think we are at a point where it's undeniable that the housing prices are way out of wack - even considering low interest rates. Hence it's not surprising that major financial institutions keep coming up with reports which predict prices to decline.
With that being said, in my view this particular report is still low balling the eventual fallout from the burst of this giant condo bubble. An 8% decline is a drop in the bucket.
In addition, TD's report doesn't acknowledge the housing bubble in Toronto during late '80s. If one were to write an objective report about what the future holds for Toronto's condo market it would be of extreme importance to look at the long term history of the market (not just 2000 onward) - especially with 70,000 units scheduled to be completed in the following two years.
Yet TD's report completely disregards the lessons of 1989.
But what were those lessons?
Below is an excerpt from FSR by Bank of Canada:
"The Toronto housing bust in the early 1990s illustrates how shifts in the balance between supply and demand can lead to a severe correction. In the late 1980s, real estate prices and the number of multiples under construction rose significantly in response to a booming economy, rapid population growth, market exuberance and lower real interest rates that drew investors as well as homebuyers into the real estate market. As supply increased and higher interest rates reduced demand, inventories of completed multiple units rose and house prices began to correct quite quickly. The effects were relatively confined to the greater Toronto region because house prices were not as stretched elsewhere."
Moreover, there many other little things that I can pick on from this report. For instance, TD mentions that 26% of all condos in the GTA were rented. Yet the bank doesn't go further to investigate condo rentals in downtown Toronto ...as if it doesn't want to. Maybe it has something to do with the fact that over 50% of new condos in the downtown core were leased. Who knows.
Finally, let's take a look at implications of resale condos being cheaper than new condos. Below is an awesome video by David Fleming. Note the video was from 2011 and how bang on he was about pre-construction condo prices flat lining.
Judging by last January being the strongest ever for new condo sales in Toronto it seems that sexy ladies at sales centers were doing a great job selling less for more. But who is buying? Horny young men deprived of rational thinking? Or aspiring chefs who like to bake their own cakes?