Fact or Fiction: Is There a Toronto Condo Bubble?

The housing bubble.

To someone who doesn’t know any better, it sounds kind of cute and innocuous… almost like a piece of décor, no? As in, “Oh that adorable ‘house bubble’ would look so nice out on the lawn for the neighbours to admire when they walk by.” Or maybe some new, patented style of home security apparatus to advertise. Can you imagine? “Hey, forget using an alarm, the ‘house bubble’ is impenetrable to home invasion!!”

By Brian Gable/The Globe and Mail.

Unfortunately, the actual definition of a housing bubble is a little more bleak, and traditionally gets characterized as a run-up in prices fuelled by demand, speculation, and exuberance. Essentially, it sees speculators enter the market, which further spikes demand. But at some point, demand decreases or stagnates, only at the same time the supply increases. This results in a sharp drop in prices. The bubble, as it were, bursts.

Hey, it’s not without precedent. Toronto’s housing bubble popped once before in the late-’80s, when an overload of buyers entered the market with the aim of turning quick profits, thus triggering an artificial increase in demand. Consequently, fewer homes became available for sale, leading to further price growth.

The question is whether a similar bubble is present or on the horizon for Toronto’s escalating condo market.

As recently as this past summer, the Canada Mortgage and Housing Corporation (CMHC) saw no such comparison. In fact, they deemed it well managed, noting that 79% of projects had reached pre-construction sales of 70%—which is a level considered critical for bank financing, plus a guarantee the project will have a chance at breaking even.

Additionally, in their summary of 2016’s first quarter, CMHC indicated that 43,860 units were under construction in the Toronto area, with only 1,373 completed and unsold. Furthermore, they reasoned the current unsold inventory was concentrated in 10% of projects, which account for 40% of the unsold inventory in the market. Among the remaining 90%, the average of unabsorbed units was just 4%.

However, just a month in the Toronto real estate market is like dog years compared to most others. Meaning that more than half a year later, it’s a whole different ball game out there.

condoA shift in Canada’s mortgage rules, younger buyers being priced out of the housing market, and lack of inventory are all contributing factors actively pushing Toronto
buyers into condominium units. Subsequently, condos are now being sold in the kind of bidding wars that resemble what’s been taking place in the city’s detached housing market. It’s quite a difference to this time in 2016, when some of the same properties which then took weeks or longer to sell are now receiving immediate multiple offers.

In fact, only a couple weeks ago, a unit at 75 Portland—upstairs from PSR’s current King West office—was listed at $639,000, received more than thirty offers, and then sold for $892,000. That’s a whopping 140% of asking price.

And just a few days ago, a PSR agent was involved in a bidding war on an east end loft. In the last year, nothing in the building had gone 6% over listing price. And the most recent direct comparable in there from eight months ago actually went for 2% under. But that was then, this is now. The unit in question ended up going for $107,178 above asking price—which is 20%! Keep in mind this was a fairly standard 1+1 bedroom soft loft unit just below 750 square feet in space.

No, a few current transactions are not going to dictate the entire landscape. But at this rate, it’s only a matter of time before it’s clear as crystal whether the Toronto condo market is in for a steep correction or not.

Until then, whether the Toronto condo bubble is fact or fiction frankly depends on an optimistic or pessimistic perspective. After all, there are several ways of analyzing the numbers, mostly depending on what side of them you were on—the winning or the losing ones.

Tell us, was your cup of coffee half-full or half-empty this morning?