Baby, we got a bubble!?

[daveto]

^^^
Now I am confused Daveto.
I wonder if you are perhaps working off the earlier version of the article.

"However, Mr. Hildebrand said on Tuesday that “investor owned” does not necessarily mean empty. He said the CMHC defines such condos as being owned by investors and rented to tenants.

“We simply don’t track that,” he said in reference to how many condos remain empty after being sold.

As well, Mr. Hildebrand clarified that the figure is actually about 22% (he made his original comments last June).

Scotia Capital originally said that CMHC had estimated 25% of Toronto’s condo market was sold but unoccupied, and added that some analysts estimated the number is actually higher. Investor occupied condos are of great interest to many market watchers, given the questions raised over how much foreign buyers are driving prices higher. Unfortunately, data on that topic remains largely anecdotal.

Update: Scotia has released a clarification of its earlier note:

Just a clarifying note on Toronto condominiums in relation to our earlier morning note. We took an overly strong interpretation of CMHC figures.

The correct figure cited by the CMHC is that about one quarter (22%) of condos in the Greater Toronto Area are being rented as one portion of the investor owned segment. This is drawn from a survey of condo boards, the last one having been conducted last Fall.
Thanks for posting.

I read this to suggest they are talking about 22% of the condos are in the investor pool of rentals, not empty. Am I wrong too?

Interested, the original article from yesterday referenced the "overly strong" interpretation which stated a 25% vacancy. I hadn't yet read the new article which came out this morning, and I agree that it clearly references 22% investor owned and presumably rented.

Notwithstanding that, it doesn't necessarily mean that there are not condos that were bought as "primarily residence" and listed by the CMHC as such, but who are now renting their unit

And the later comments in my post still stand, in that it is statistically very possible to have 22% of condos as renters, even as the City of Toronto is 50% renters in total. (although I think the proportion of renters in condos is probably a little higher than 22% - lots of owners don't like paying income tax on their rental income, go figure ;-)

 

[MAU]

There do seem to be an awful lot of dark apartments at night. It's a shame that statistics aren't kept on vacancy rates. Like daveto points out, the CMHC stats don't reliably say much about the actual vacancy rates.

I think the original article spooked a lot of people. It would be a clear indicator of a bubble. I'm curious to know what the incentives are for keeping an apartment vacant. Would a speculator be expecting a higher resale value if it's never been lived in?

 

[interested]

^^^
Yes Mau.

In certain locations the "new factor" drives up the price more than people living in it so if prices are rising in these markets speculators would rather keep it empty, forgo rent as they can get more for a "new never lived in" place.

I do not believe that is necessarily the case in Toronto and certainly investors will not do this. With the slow down in price appreciation, this does not become a sensible policy.

I think regarding the dark apartments one would have to judge buildings about 6 months after they have been moved into. The first 6 months with people moving still moving in and sellers/speculators unloading, it may mislead if one looks before that.

 

[ILuvTO]

Interested, the original article from yesterday referenced the "overly strong" interpretation which stated a 25% vacancy. I hadn't yet read the new article which came out this morning, and I agree that it clearly references 22% investor owned and presumably rented.

Notwithstanding that, it doesn't necessarily mean that there are not condos that were bought as "primarily residence" and listed by the CMHC as such, but who are now renting their unit

And the later comments in my post still stand, in that it is statistically very possible to have 22% of condos as renters, even as the City of Toronto is 50% renters in total. (although I think the proportion of renters in condos is probably a little higher than 22% - lots of owners don't like paying income tax on their rental income, go figure ;-)

Fair enough. However I have to respectfully disagree with you. To me, the numbers just do not reconcile. In C01 we have 32% of residents being owners, while the CMHC stated in the revised article that 80% of units are occupied by owners. I understand that the CMHC is not specifically referring to C01, however that section is where quite a bit of development has/is occurring. Also, I can't see home ownership rates being any greater in other parts of downtown, so that can't be skewing the numbers. There is a definite disconnect somewhere. I'm more inclined to believe the census numbers than something someone at the CMHC pulled out of the air. It seems like they can't get their story straight over there.

 

[cdr108]

There do seem to be an awful lot of dark apartments at night. It's a shame that statistics aren't kept on vacancy rates. Like daveto points out, the CMHC stats don't reliably say much about the actual vacancy rates.

I think the original article spooked a lot of people. It would be a clear indicator of a bubble. I'm curious to know what the incentives are for keeping an apartment vacant. Would a speculator be expecting a higher resale value if it's never been lived in?

having a vacant apartment, sorry 'condo':
* would be easier for showings and saleability to an end-user buyer
* would not have any potential damage that would need to be corrected
* could potentially qualify for owner occupied status vs. rental unit, if the owner/speculator lies about it and there's no tenant trail, thus complete tax free capital gains
* if the owner/speculator is from overseas, there's more tax reporting needed for rental income
* would not need to pay property management fees for someone to take care of it if the owner/speculator is from out of town/country
* if the assignment/sale is pre-registration, again the CG could be completely tax free, if the owner/speculator does not report it as alluded to in G&M article

ps - forgot to add, i don't know if you've been a landlord before but being a good landlord takes alot of hardwork and effort. being an absent or slumlord is easier.

 

[daveto]

Fair enough. However I have to respectfully disagree with you. To me, the numbers just do not reconcile. In C01 we have 32% of residents being owners, while the CMHC stated in the revised article that 80% of units are occupied by owners. I understand that the CMHC is not specifically referring to C01, however that section is where quite a bit of development has/is occurring. Also, I can't see home ownership rates being any greater in other parts of downtown, so that can't be skewing the numbers. There is a definite disconnect somewhere. I'm more inclined to believe the census numbers than something someone at the CMHC pulled out of the air. It seems like they can't get their story straight over there.

ILuvTo, while I agree that renters in condos is probably higher than 22%, I think you're comparing apples to oranges.

Apples-68% renters in C01 all property types in 2006

Oranges-22% renters in City of Toronto Condos in 2011

C01 is 5% of the City of Toronto.
Home ownership rates increased from 2006 to 2011
Condos are 10-15% of the housing stock in the City of Toronto.

I point out that the chart you posted (which I compiled earlier) showed some wildly divergent home ownership rates by location (ie 68% renters in C01 vs 21% in Scarbough-Rouge River).

Just to clarify, I'm talking more to the statistics of this and that the apples/oranges points above are not contradictory. I agree that the rental rate in C01 condos is probably much higher than 22%

 

[interested]

I agree with daveto, ILuvTo.

Once outside the "condo belt downtown and from Yonge and 401 to Yonge Steels, and perhaps Yonge and Eligible, where there are more condos than other neighbourhoods, I would bet that in SFH they are 95% owner occupied and that Town homes probably 90%. Since there are more single family homes despite recent flip around with more Multiunits being built, based on overall supply I would think the majority are owners. Furthermore, the usually quoted home ownership rates for Canada reached 70% I believe....so logic would dictate that there would be more owners than renters....unless my logic is flawed.

 

[ILuvTO]

ILuvTo, while I agree that renters in condos is probably higher than 22%, I think you're comparing apples to oranges.

Apples-68% renters in C01 all property types in 2006

Oranges-22% renters in City of Toronto Condos in 2011

C01 is 5% of the City of Toronto.
Home ownership rates increased from 2006 to 2011
Condos are 10-15% of the housing stock in the City of Toronto.

I point out that the chart you posted (which I compiled earlier) showed some wildly divergent home ownership rates by location (ie 68% renters in C01 vs 21% in Scarbough-Rouge River).

Just to clarify, I'm talking more to the statistics of this and that the apples/oranges points above are not contradictory. I agree that the rental rate in C01 condos is probably much higher than 22%

I agree with daveto, ILuvTo.

Once outside the "condo belt downtown and from Yonge and 401 to Yonge Steels, and perhaps Yonge and Eligible, where there are more condos than other neighbourhoods, I would bet that in SFH they are 95% owner occupied and that Town homes probably 90%. Since there are more single family homes despite recent flip around with more Multiunits being built, based on overall supply I would think the majority are owners. Furthermore, the usually quoted home ownership rates for Canada reached 70% I believe....so logic would dictate that there would be more owners than renters....unless my logic is flawed.

Agreed with you both on all counts. I guess I am not articulating myself well though. What I am trying to say is that I feel it is an apples to apples comparison in the sense that CMHC was not commenting on Toronto as a whole, but specifically on the new condo construction downtown (this is how I understood their comments). Based on that, I feel that you can then fairly compare to the 2006 census numbers for C01. CMHC says 80% of these units are owner occupied, while the census says otherwise.

If I misread CMHC's comments in the article and they were in fact referring to the whole of Toronto, then I apologize. In that case it is most definitely an apples to oranges comparison.

 

[cdr108]

http://www.toronto.ca/demographics/pdf/2006_population_and_dwelling_count_backgrounder.pdf

Population
• The 2006 population of Toronto is 2,503,281, 8% of Canada’s total population of 31,612,897.
This does not include the Census undercoverage, which is discussed below.
• Between the 2001 and 2006 Censuses Toronto’s population grew by 21,787 residents, an increase
of 0.9%.
• The 2006 population of the GTA is 5,555,912, 18% of Canada’s population. The City of Toronto
accounts for 45% of the GTA’s population.
• Between the 2001 and 2006 Censuses, the GTA’s population grew by 474,086 persons, an increase
of 9.3%. Toronto accounted for about 5% of the GTA’s growth.
• The GTA is growing most rapidly in the Regional municipalities around Toronto. The Regions
grew between 10% and 22%, while Toronto’s population grew by only 0.9%.
• Toronto’s population grew more slowly between 2001 and 2006 at 0.9% than it did between 1996
and 2001 at 4.0% and between 1991 and 1996 at 4.8%.
• The provincial Growth Plan for the Greater Golden Horseshoe (GGH) contains population
forecasts to 2031 “that will be used for planning and managing growth in the GGH,” including
forecasts for 2011. The rate of growth to 2006 can be estimated as the compounded 5-yearly rate
required to reach the forecasted population from 2001 to 2011. For Toronto, this rate is 3.2% and
for the GTA it is 9.2%.
• Between 2001 and 2006 Toronto’s growth rate of 0.9% fell well below the GGH forecasted


• The slower than expected growth may reflect the possibility that the Census may have missed more
people than is usual. The data show a large difference of 61,270 units (5.9% of the total stock)
between the total dwelling count and ‘private dwellings occupied by usual residents.’ The 2001
Census only showed 22,475 such units (2.3% of the total stock). The suggestion is that much of the
difference is made up of vacant units. If, however, these units were occupied by people who did not
respond to the Census, and the difference between total units and ‘private dwellings occupied by
usual residents' was similar to 2001, the population growth would be about 4.0%, much closer to
the levels expected in the City’s projection, and matching the growth from 1996 to 2001.

Dwellings
• The total number of Occupied Private Dwellings in Toronto grew from 943,080 in 2001 to 979,330
in 2006.
Note: dwelling unit change is a net change. It includes new units built since the last Census, new
second suites in houses, and units demolished or deconverted.
• Over the last 5 years, dwellings in the GTA increased by 10.4% from 1,780,475 to 1,965,664.
Toronto has 50% of the GTA’s dwellings.
• Toronto accounted for 5% of the GTA’s increase in dwelling units.


http://www.toronto.ca/planning/pdf/housing_rental.pdf

 

[daveto]

CDR, thx for the analysis. I think the some of outlying regions had their borders expanded, 2001-2006 and that would account for a significant part of the large increases in residents and dwellings in the non-city of toronto regions.

 

[interested]

^^^
thank you CDR as well.

Am I correct in then reading that far and away most of the growth occurred in the 905.

However, ILuvTo's point I think is that he believes the numbers he is quoting refer to C01 or downtown at least and condos specifically. If this is correct, does the statement:

"The data show a large difference of 61,270 units (5.9% of the total stock)
between the total dwelling count and ‘private dwellings occupied by usual residents.’ The 2001
Census only showed 22,475 such units (2.3% of the total stock). The suggestion is that much of the
difference is made up of vacant units."

explain why it appears that vacant units make up about 64% of the market?

 

[rbt]

Also, it is interesting to me that a developer who is not building in Toronto thinks TO is overheated.

Problem is, he also has zero Toronto experience. I would be far more interested in his opinion if he was a former Toronto developer and put a timeframe into play.

Timing is a very important part of this statement. We're 3 years past when prices probably should have fallen, 6 more years of steady gains is possible particularaly if the US has a couple of good quarters in a row.

It's also possible a hard fail of Greece and deterioration of Ireland/Spain could give Toronto another solid decade of construction; we're a pretty obvious destination to people fleeing.


I sold all my real-estate except my primary residence over the last couple of years, so you know where my money is.

 

[ISYM]

I believe I inadvertently provided the below back a number of pages ago when I suggested population growth was heading back to TO. That is 2006'c census. it's out of date. 2011 is what I should have provided which is http://www.toronto.ca/demographics/pdf/2011-census-backgrounder.pdf

Occupied Dwelling Units Percentage change (page 7)

Toronto 2001-2006 = 3.8% ....... 2006-2011 = 9.8% ......expansion
Halton 2001-2006 = 17.4% ....... 2006-2011 = 14.1% ....shrinkage
Peel 2001-2006 = 16.3% ....... 2006-2011 = 12.2% ....shrinkage
York 2001-2006 = 23.5% ........2006-2011 = 17.4%.....shrinkage
Durham 2001-2006 =13.4% ........ 2006-2011 = 9.8%......shrinkage
Hamilton 2001-2006= 4.0% ........ 2006-2011 = 4.8%.......expansion

The greatest growth has been York region which has gone from 24.84% the size of Toronto’s population to 39.56%. (page 8) in stark numbers:

Population Toronto .............Population York ........................................
1996 = 2,385,421 ...................592,445..........difference = 1,792,976
2001 = 2,481,494 ..................729,254..........difference = 1,752,240
2006 = 2,503,281 ..................892,712..........difference = 1,610,922
2011 = 2,615,060 ................1,032,524..........difference = 1,582,811

In 1996 Toronto represented 46.80% of the GTA’s population. In 2006 it was 45.1% shrinking to 43.2% in 2011. Proportionally this change should have been reflected in occupied housing yet the reverse occurred - where the other regions’ 5 year rate slowed by 3.23% Toronto’s increased by 3.16%

Toronto..................% Change.......All Other......% Change
1996 = 903,580............... ....893,040....................
2001 = 943,080... 4.37%.........1,024,280...........14.70%
2006 = 979,330....3.84%.........1,180,779.......... 15.28% growth
2011 = 1,047,877....7.00%.........1,323,047.......... 12.05% shrinkage

http://www.toronto.ca/demographics/pdf/2006_population_and_dwelling_count_backgrounder.pdf

 

[interested]

Problem is, he also has zero Toronto experience. I would be far more interested in his opinion if he was a former Toronto developer and put a timeframe into play.

Timing is a very important part of this statement. We're 3 years past when prices probably should have fallen, 6 more years of steady gains is possible particularaly if the US has a couple of good quarters in a row.

It's also possible a hard fail of Greece and deterioration of Ireland/Spain could give Toronto another solid decade of construction; we're a pretty obvious destination to people fleeing.


I sold all my real-estate except my primary residence over the last couple of years, so you know where my money is.

I agree with your first point about the developer. However, it would be unlikely for a developer here to come out and say "don't buy my product" as I believe prices will fall since we are overdeveloping. It will take someone independent to say that. However, as I said, he may not be independent because a slowdown in Vancouver and Toronto could potentially send money Montreal's way.

I congratulate you on proof of your convictions by selling all your real estate. However, while I fully expect a correction and it may be more severe rather than less, I think it is difficult to time the market and further putting all ones eggs in one basket or no eggs in the basket (though you have your primary residence) I think is also extreme.

I am guessing you have about 8% lost price escalation in 2 years and probably another say 8% of fees incurred in the selling process. Further, there will be capital appreciation but assuming taxes were paid if the appreciation was 20%, assuming a 50% tax bracket, another 5% of your equity will have been lost to the government. Hence, if your long term decision is to be out of real estate, fine, but if not you have to now expect a 21% decline. It may be more. I am not second guessing you and I do congratulate you for making an objective decision based on "best information" and acting on it.

Personally, I am holding my rental real estate but it has been purchased (the last at $410/sq.ft.) in 2008. Otherwise, I bought in 2001 rental property so it has essentially gone up about 80%. I get cash flow which is positive based on cost and even based on todays value. I do not wish to sell because this provides part of a balanced portfolio though I fully expect it can go back down 15-25% and one could argue it makes sense to sell and buy again. However, it will take 25% drop when all is factored in for me to actually be worse off if I wish to replace the portfolio later.

 

[marsh]

Story from the Globe today:

Are Canadians ready for higher rates?
JEREMY TOROBIN
OTTAWA— Globe and Mail Update
Posted on Wednesday, May 9, 2012 5:18PM EDT
Policy makers are right to fret about overbuilding in the Toronto and Vancouver condo markets, but it’s worth remembering that unless those bubble-like markets burst, the less-than-ideal mix of high household debt and overpriced housing may be more manageable than it looks.
Concerns about housing have been in sharp relief for weeks now, long before Tuesday’s report from Canada Mortgage and Housing Corp. showed a surge in condominium construction, which helped push overall construction starts up 14 per cent last month to the fastest annual rate since September, 2007. That's because Bank of Canada Governor Mark Carney started hinting in mid-April that he is looking for an opportunity to start lifting his key interest rate from the current 1 per cent. He also reiterated his concerns about too many people failing to resist the lure of cheap debt that won't be as affordable when rates are higher.
Francis Fong, an economist with Toronto-Dominion Bank, says in a study released Tuesday that while most Canadians look “well-positioned” to absorb an interest-rate increase of around 2 percentage points, “there is a substantial minority that cannot.”
Specifically, Mr. Fong points to analysis from the Bank of Canada itself, which warns that 7.5 per cent of Canadian households could be in some financial trouble once borrowing costs “normalize.” He also points to a projection by the Canadian Association of Accredited Mortgage Professionals that a benchmark rate of 3 per cent would put 21 per cent of all mortgage holders in hot water.
But here’s the thing: nobody believes Mr. Carney has any intention (or capacity) to bring interest rates to that level anytime soon. Even TD, which predicts the first rate hike will come before the end of 2012, sees Mr. Carney moving very gradually to 2 per cent – by the end of 2013. The central banker will be able to move more aggressively once the European crisis seems more stable again, and once the U.S. economy is stronger and the Federal Reserve is closer to hiking, too. So, Mr. Fong warns, barring another “major shock” to the global economy, Mr. Carney’s rate (which directly influences variable-rate mortgages and other floating loans) will rise by at least 2 percentage points before 2015.
Mr. Fong’s main point is that while higher rates are hardly a boon for consumer spending, rates will go up so slowly that there “will likely be enough lead time” for many households to “adjust their spending habits” to account for higher payments.
Moreover, he points to signs that Canadians are already accumulating debt at a slower rate, as does Benjamin Tal of CIBC World Markets in a separate report. Even in an environment of historically low interest rates, Mr. Tal says, overall household credit is rising at the slowest pace since 2002.
“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” he argues, suggesting Mr. Carney’s warnings are being heeded after all.
No need to worry, then? Afraid not.
TD’s Mr. Fong notes that annual mortgage credit growth, while down from its pre-recession peak, has held steady at an almost 8-per-cent pace for three years. This suggests borrowers are using their credit cards and lines of credit less, but taking out mortgages at roughly the same clip.
And Mr. Tal notes in his report that the real-estate market is “overshooting,” even as signals suggest – in most markets, anyway – that activity is slowing down.
Which brings us back to overbuilding in Toronto and Vancouver. The same day that CMHC published its eye-popping housing starts numbers, the Crown corporation said in its annual report that it sees no “clear evidence” of a bubble. Mr. Carney, meanwhile, will probably never utter the B-word, but has been hinting for several months that he sees at least the makings of one in some cities.
This below is in his semi-annual assessment of the financial system, from December: “Certain areas of the national housing market may be more vulnerable to price declines,” he said, adding, “the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of correction in this market.”
Over and over again since then, Mr. Carney has said authorities are watching closely, and will act to cool the market if necessary, while stressing that interest-rate hikes are too blunt an instrument to deal with this issue, other than in “exceptional circumstances.” With Greece and Spain roiling global markets again, and lukewarm economic news south of the border, it’s harder to imagine Mr. Carney raising rates this year than it was a few weeks ago. Still, the excess supply of condos in Canada’s biggest cities suggests we may have reached “exceptional circumstances.”
That leaves CMHC and, by extension, Finance Minister Jim Flaherty, who is in the process of beefing up oversight of the often clueless-sounding agency.
Mr. Flaherty warned recently that condo developers seem willing to build new units until sales dry up. This could lead to a crash, and the last buyers in could get burned, he warned in a meeting with The Globe and Mail’s editorial board last month.
Some of this frenzied building and buying is linked to foreign investment, the actual amount of which is hard to know since even the government says it doesn’t know. So there may be little the government can do, other than hope the market lands softly.
However, if Ottawa is so worried about the last buyers in, there is one thing it could do to ensure that those people are not the Canadians who can least afford to get burned. The last of three times that Mr. Flaherty has ordered CMHC to tighten its eligibility requirements, in January, 2011, he opted against raising the minimum down payment from the current 5 per cent. (Mr. Flaherty had been warned by the Canadian Real Estate Association and Canadian Association of Accredited Mortgage Professionals that raising the current 5-per-cent minimum down payment would shut too many first-time buyers out of the market and cost jobs.) Raising the minimum to, say, 7 per cent, would seem to be a measured, prudent way for Ottawa to limit the number of naive new borrowers who could be left holding the bag for a lifetime because greedy condo builders couldn’t rein themselves in.