Condo developers in the GTA are feeling bullish in the face of record completions and warnings of potential overbuilding. So found Fortress Real Developments in its fourth edition of The Market Manuscript, released last week.
In a survey of 62 Canadian homebuilders, which skewed toward high-rise developers in the GTA, 81 per cent of respondents expressed confidence in the housing market, reporting that they are actively pursuing new opportunities. That compares with the 18 per cent of respondents who say they are exercising caution by focusing on existing sites and one bearish respondent looking to unload real estate holdings.
The report’s author, Ben Myers, evaluates investment opportunities for Fortress as its senior vice-president of market research and analytics. Myers says the Canadian real estate development company shares the bullish outlook expressed by the survey respondents — at least in the GTA market.
“We raise the capital for our projects through a retail channel [and investors] see what’s happening in Calgary, so we’re not actively seeking projects in Alberta at this time,” he says. “We’re really just sticking with southwestern Ontario.”
Despite the impact of plunging oil prices on the western provinces, the housing market has fared better than Myers expected up to the midway mark in 2015, considering the uncertainty at the start of the year. Prices in the Alberta market have largely held steady and feared spillover effects from the embattled energy sector into the Ontario market never materialized.
Looking ahead, many developers believe future interest-rate hikes pose the greatest risk to the housing market, with 42 per cent of survey respondents identifying them as their top concern. Myers was surprised by the level of concern over interest-rate hikes, but surmises it’s a reflection of the survey’s skew toward high-rise developers.
“Their product is more aimed at a first-time buyer than it would be a move-up buyer,” he explains. “They’re more concerned with the buyers on the margin, and buyers on the margin are looking at their carrying cost, and any small increases can influence their decision to purchase.”
In The Market Manuscript, Myers cites a Scotiabank report that indicates a majority of Canadians are locked into fixed-rate mortgages and suggests that post-occupancy condo prices are at enough of a premium — an average of 28 per cent in the former City of Toronto — to absorb adjustments. The price premiums on condos also underpin what he believes is a false alarm over potential overbuilding, which the Canadian Mortgage and Housing Corporation is now monitoring for in Toronto.
While Myers acknowledges the deluge of high-rise completions over the past couple of years, he adds that it must be viewed alongside dwindling low-rise supply. The 37,400 housing starts Fortress is projecting in the Toronto Census Metropolitan Area for 2015 is within the upper limit of the generally accepted range of projected household formation (35,000 to 38,000 per year).
Rather than look to absolute numbers of completed and unabsorbed units, Myers points to the percentage of units sold at completion.
“The key metric is, last year, 97 per cent of the high-rise units that came to completion were sold, which is an unbelievable number, and it’s still well above 95 per cent,” he says. “If a developer is not profitable at 95-per-cent sold, then they’re doing something wrong.”
The upshot of this is that developers can afford to take their time in selling the remaining five per cent of units in a project.
Indeed, even if faced with 10 per cent of units unsold on a project, more than half of the developers surveyed said they would continue to try to sell them at market price, while one-quarter said they would rent out some or all of the units and 12 per cent said they would never reduce their prices.
“14.6 per cent of developers are trying to sell at above market price,” says Myers, “so they’re going to price them high and hope that if they just wade along in the market, that one buyer is going to come along and say, ‘I love this unit, I see it’s slightly overpriced, but this is where I want to live, and I’ll pay for it.’”
Interestingly, The Market Manuscript notes that nearly one-quarter of the GTA’s unsold inventory is held by just two developers and one-third of the GTA’s unsold inventory is housed in five of the 115 completed projects containing unsold inventory.
“There’s a lot of misunderstanding about unsold supply, and people like to quote that on a regular basis about how bad the market is, unsold supply is up,” says Myers, “but really, it’s not a terrible thing when you look at it in its proper context.”
Michelle Ervin is the editor of CondoBusiness.