Four years ago, the year 2015 loomed large for Toronto condo market observers. Serious discussions about the extraordinarily high new condo sales volumes being reported in 2011 occurred internally at Canada Mortgage and Housing Corporation (CMHC) and externally with the developer community.
Leading up to then, sales had recovered nicely in 2010 and the market was back to its previous peak, reached in 2008. Then suddenly, the volume of new projects brought onto the market exploded.
Between Q2-2011 and Q1-2012 more than 30,000 units launched for pre-construction sales — a level that was 50 per cent higher than in 2010 and twice as high as annual totals averaged in the previous 10 years. And they were were selling extremely fast — by the end of March 2012 the 125 new projects launched in the previous 12 months generated 20,000 sales (66 per cent absorption).
The concern was that the amount of new supply introduced in such a short period of time would lead to a spike in inventory under construction and eventually a glut of newly built units. Although developers heavily pre-sold the units, the common view was that most of the buyers were investors, who could flood the market with condos flipped for resale.
Observers saw a low amount of short-term speculative investing, which seemed to mitigate the risk, but conditions could change and the economic outlook was even more uncertain than it is today. With development timelines averaging four to five years, the countdown to 2015 had begun.
Fast-forward to today and the construction scenario has been playing out as expected. The number of condos under construction peaked at close to 60,000 units in mid-2013, which has since led to the highest number of completions the market has ever witnessed. In the 18 months to March 2015, roughly 31,500 units finished construction, with 21,000 completed in the past 12 months. All the while, market conditions have remained very stable. In fact, resale price growth is actually starting to accelerate.
So what happened to the glut?
So far, the condo market has benefited from two key factors: investors having the intent and wherewithal to hold onto their units and, perhaps more importantly, near perfect timing.
Urbanation’s tracking of turnover on the Multiple Listing Service (MLS) system shows that just two per cent of new units registered in the past year have been resold, while 26 per cent were rented out. When including means of renting outside the MLS, the share of new units rented was likely closer to 40 per cent.
These figures align with CMHC’s latest rental market survey showing that the total number of condos used as rentals has grown by an average of about 20 per cent in each of the past two years, to total more than 90,000 units — about 30 per cent of the entire condo stock. Meanwhile, the purpose-built rental stock has remained stagnant, with 92 per cent of units now more than 35 years old.
At the same time that condo rental supply has swelled, so has pent-up demand for new rental supply, as shown by the record volume of leases transacted. Looking at the demographic data from the past few years, it’s not hard to see why.
Although it was unknown in 2011, due to lags in data reporting, net immigration totals for the Toronto Census Metropolitan Area reached a record high of 94,000 persons that year. This led to a severe shortage of rental housing, which saw purpose-built vacancy rates fall to 10-year lows. What’s more, in 2012, the millennial generation drove population growth in the 20 to 34-year-old age segment — the largest source of rental demand — to a 30-year high, of 2.4 per cent. The convergence of these demographic trends pushed condo vacancy rates even lower.
So the anticipated supply arrived in 2014 at the most opportune time, as the market was yearning for new rental product. And even though demographic support has waned somewhat over the past two years, steady job growth and migration to the core continue to maintain high levels of rental demand. In fact, vacancy rates for condos even fell back to their 2012 level — 1.3 per cent — last year.
Investors have also benefited from mortgage rates declining again to historic lows, making it easier for them to hold their units. And while supply growth will remain strong this year as completions stay high, the GTA rental market is also expected to benefit from a rise in migration to the region as population flows are redirected away from western Canada.
If timing is everything, it has certainly spared the Toronto condo market from the previously predicted glut.
Shaun Hildebrand is the senior vice president of Urbanation Inc.