Jump in March housing starts renews fears of over-built market

A big jump in home construction last month has reheated concerns by some analysts over the prospect of an overheated housing market. But the problem is highly localized, specifically among Toronto condominiums.

That's because the March data on housing starts showed a sharp divide between Toronto condos and the rest of the market. While the number of starts jumped by an unexpected five per cent across Canada in a market that was expected to be roughly unchanged, ``this was pretty well entirely Toronto condos,'' said economist Robert Kavcic at BMO Capital Markets.

Construction of Ontario multiple-unit buildings - mainly condos in Toronto - shot up by more than 50 per cent between February and March, while the rest of the nationwide market remained little changed from its average pace over the past 12 months.

``Canada's condo craze kicked into even higher gear during March, and this is bound to feed concerns about over-building,'' said Scotia Capital economists Derek Holt and Dov Zigler in a note to clients.

Holt and Zigler expressed concern that the number of unsold new condominium units has been rising sharply.

Other analysts noted that the condo boom isn't evident in other big markets, so there's little reason to see a widespread problem in the housing market. Montreal condo starts. for example, have trended down in recent months

In Toronto, however, there are lots of anecdotal reports of international investment money flowing into Toronto's condo market as a refuge from the low investment returns and economic uncertainties recently dogging many other countries, noted economist David Onyett-Jeffries at the Royal Bank.

On top of this, the huge jump in March construction is likely the result of exceptionally good weather and the fact that condo construction activity can move sharply up in any month, that sees a single big new project.

The recent level of condo starts in Toronto is creating strains in the market, believes Craig Alexander, chief economist at the TD Bank. Although he doesn't see it as the kind of speculative mania that would foreshadow a serious meltdown, there does seem to be a surge of supply that will be hard to absorb.

Alexander agrees with Onyett-Jeffries that international investors look like a large factor, but he thinks they're mostly looking for long-term rental income in a world where gains on financial markets have been uncertain at best, not the overnight capital gains one seeks by flipping units in a speculative market.

Still, Alexander believes, the vigour of Toronto condo construction has turned this market, along with the painfully high-priced Vancouver housing market, into the high-risk neighbourhoods of Canadian real estate.

The problem with having an skyrocketing, investor-driven condo market, he notes, is that all the units now being built could flood the market, leaving some investors unable to find tenants and inclined to sell. If many sell at once, it could easily trigger a decline in all condo prices.

That probably won't be catastrophic, since Toronto's demand for housing is strong enough to sop up the excess units over the coming decade, but it could lead to bigger-than-average price declines over the next few years. Alexander estimates that the national home market is already overpriced by an average of 10 to 15 per cent.

His forecast, though, is that most of Canada will be able to back off from today's high home prices with minimal damage. Across the country, he thinks prices will be roughly flat this year, then drop perhaps eight to 10 per cent, perhaps a bit less, over the following two years as rising mortgage interest rates squeeze demand.

Under this scenario, the fall-off in demand would be gradual enough that price declines would have to offset only about two-thirds or less of today's overvaluation. Rising average incomes would fill the rest of the gap.

The big exceptions are likely to be in the Toronto condo market and the Vancouver market for both condos and single-family homes. Vancouver has actually cooled recently, but remains the highest-priced market in the country.



Montreal Gazette



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