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http://www.thestar.com/business/2015/06/25/condo-boom-has-helped-stabilize-housing-market-cibc.html
Condo boom has helped stabilize housing market: CIBC
Canadian real estate market is not at any risk of a U.S.-style housing meltdown, new report says.
By: Susan Pigg Business Reporter,Published on Thu Jun 25 2015
The booming condo market has so far been a stabilizing, rather than a destabilizing, force in Canada’s housing landscape – an affordable safety valve for first-time buyers, renters and newcomers.
But demand appears to be moderating and the number of new units could soon outstrip demand by some 2,000 units a year, which could depress both condo values and rents and create “a wave of sales in the resale market that will directly compete with the upcoming influx of new units,” says a CIBC World Markets report.
Overall, however, the Canadian real estate market is not at any risk of a U.S.-style housing meltdown, say economists Benjamin Tal and Andrew Grantham in a paper released Thursday titled “The Many Faces of the Canadian Housing Market.”
“Unlike the situation stateside, there isn’t anywhere near the same degree of overbuilding in Canada relative to household formation. In fact, the ratio of housing starts to household formation is not far from its long-run average,” the paper notes.
Even where there has been some overbuilding – Ontario, Alberta and British Columbia – it’s been marginal and largely offset in their largest cities by immigration. Not only has immigration accounted for about three-quarters of Canada’s population growth recently, the report says, but more than half those newcomers, a higher proportion than in the past, have been in the prime home-buying years of 25 to 45.
While “the day of reckoning” will come for Canada’s housing market when interest rates start to rise, in fact it may not be as painful as widely assumed: Some 30 to 40 per cent of Canadian homeowners appear to have taken warnings around record-high household debt to heart and are now accelerating their mortgage payments to the tune of an estimated $11 billion more in principal than officially estimated, says CIBC.
It makes no sense to look at the Canadian housing market as a whole, given regional and local differences that are skewing the overall picture, such as weakening prices in Calgary in the face of slumping oil at the same time Vancouver and Toronto are on fire, the report notes.
“In fact, the annual rates of house price growth in Vancouver and Toronto have, if anything, accelerated since the start of the year.”
But there’s a lot going on in the market, still, to keep housing bears wringing their hands, it says. Among them are worrisome trends – such as the growth in alternative, higher-interest lending as more conventional financial institutions have tightened up mortgage qualifying rules under the direction of Ottawa in an attempt to cool the market, especially in Vancouver and Toronto.
“...The market as we see it increased transfer of risk from large financial institutions to alternative lenders. This is not a zero sum game – as the risk profile in the industry as a whole is on the rise.”
The good news is that alternative lending remains “an extremely small portion of total mortgage activity in Canada – probably smaller than perceived by many,” notes the report.
“That is not to suggest that the system is risk free. Increased regulations on major financial institutions (that make it harder for some buyers to qualify for mortgages) combined with even lower mortgage rates may work to widen those shadowy margins.”
The condo market will, as always, be the most interesting to watch in the coming years, notes the report, as investors and developers increasingly look to build rental apartments at the same time condos now under construction come on the market.
While the Canada Mortgage and Housing Corporation has estimated that just under 20 per cent of Toronto and Vancouver’s condos are owned by investors – fewer of them off-shore investors than many assume, says CIBC – the World Markets report estimates that some 70 per cent of preconstruction condos are now being bought up by investors.
“Capital appreciation and rent income are currently the main motivation for investment activity. And that’s where the vulnerability is. We estimate that roughly half of the stock of rental units in the cities belong to this category.
If interest rates rise, at the same time rents soften in the face of further increases in the supply of condos on the market, “we might see a wave of sales in the resale market” which could flood the market and push down condo prices.
More than a crash, or significant defaulting on mortgages as happened in the U.S., CIBC anticipates that any downturn in the housing market would “act as a major drag on overall economic activity” by dampening consumer confidence and boosting unemployment in construction and real-estate related businesses.
