Is a crash in the Toronto condo market imminent?

Close proximity to nightlife, walking distance to the downtown core and the desire for a cosmopolitan lifestyle are reasons why so many people have engaged in Toronto’s condo market. Over the past five years, this real estate segment has seen a boom that was unprecedented in Canada’s largest city.  From young people looking to live downtown to rich foreigners looking for a place to invest their money — new construction units were selling out fast.

But more recently, Toronto’s condo market has cooled down. After nearly five years of booming activity, high-rise condo sales were down 6.4% in May. That’s according to the Toronto Real Estate Board, which has been watching this particular segment carefully. The agency now worries that condo prices will also follow a downward trend, leaving its owners with little equity in their homes.

For months, The Bank of Canada has been warning of a collapse in the city’s condo market. It says over-supply and over-pricing are perfect conditions for a real estate storm and that a correction is long overdue. However, some economists predict a soft landing for Toronto’s overheated condo segment, as opposed to a U.S.-style crash.

Canada has largely been able to avoid the 2008 economic crisis that crippled the U.S. economy — thanks to strict mortgage rules and fiscal prudence that had been in place for several decades. However, Finance Minister Jim Flaherty has publicly scolded Canadian banks for offering discounted mortgages — putting consumers in massive household debt that is sometimes unmanageable.

Benjamin Tal is deputy chief economist of CIBC World Markets. He recently told the Globe and Mail his thoughts on Canadian spending habits and what it means for the housing market. He says, “In Canada during the recovery it was almost a crime not to take a mortgage. We were able to borrow our way out of this recession, which is why we are now sitting on this elevated debt level.”

Elevated debt levels coupled with an over-supply of condo units have many observers fearing that things will end quite badly.

Here’s a breakdown of the facts: 

55,000 new condo units are currently under construction in Toronto. Many of them are in the city’s “condo alley”, which starts at Liberty Village and goes east for nearly five kilometers through the downtown core.

Median condo prices have risen 25% since 2009.

Two-bedroom condos (850-900 sq. ft) sell for about $500,000 in Liberty Village.

Despite a worrisome condo market, Toronto’s overall real estate landscape is strong due to sales in detached and semi-detached homes. According to TREB, it is low-rise properties that are really driving the city’s housing market. In the meantime, economists are hoping that things calm down even further in Toronto’s overheated condo segment. Many observers say the best case scenario is that prices simply stagnate over the next several years.

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