“We’re coming off unsustainable rates of growth,” said Shaun Hildebrand, Urbanation’s senior vice president. “It’s not healthy for a market to see these rates of appreciation. If we did, the ramifications would be more severe than expected, so expect the market to transition more quickly away from rapid rate of growth and record level of sales as we move into 2018.
“That will come as there will be less aggressive investor demand, who have been the largest buyers of new condominiums.”
Hildebrand says that while investors have cashed in on high condo rents – prices hit $2.98 per square foot during the third quarter of 2017 – and capital appreciation, there are sobering risks they won’t be able to ignore going into next year.
“You have to take into consideration that rents have been growing strongly, but not growing anywhere near as quickly as prices, so that puts at risk holding costs for investors being higher than achievable rent levels when the units come into completion,” said Hildebrand.
The report forecasts a possible injection of supply somewhere in the neighbourhood of 12,000 units during the fourth quarter, and that should boost annual sales to 34,000, which would be a record and 7,000 more sold units than last year. However, that will only provide temporary relief.
“The injection of new launches that will come into the fourth quarter will help to balance the market out,” said Hildebrand. “We’re close to a 15-year low of inventory right now, but this is going to move us in the right direction of reaching a healthy level of inventory, which should be about 16-17,000. That’s where we should be but we’re less than half the 10-year average. It’s not going to move us back there immediately, but it’s a step in the right direction.”
Hildebrand also says OSFI rule changes won’t impact the condo market too much because buyers of pre-construction units always have to pay posted rates. The resale market, however, is where prospective buyers, priced out of the single-family market, will look for relief.
But Paul D’Abruzzo, an investment advisor with Rockstar Real Estate, called the mortgage rule changes a wild card. He doesn’t imagine the provincial rollout of rent control, as part of the Fair Housing Plan, will quell investor appetite for rental properties.
He surmised the mortgage rule changes will stymie activity in the market for a short period of time, and that could have a stabilizing effect.
“My guess is the market comes back real slow in January,” said D’Abruzzo. “You could say our good friend Kathleen Wynne basically destroyed any chance developers will build purpose-built rental buildings because of the changes she made in April. We’re taking a counterintuitive approach of condos fueling demand for rentals downtown. We can’t just keep up with condo rentals, but that’s all we’ve got. We’ll see a short- to medium-term gain there until we do something about getting some more purpose-built stuff in there.”
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An Urbanation report predicts a balanced condo market moving into next year – and with it a moderation of investor activity.