25 June 2018

“In 2017, we saw condos being sold almost immediately, but now the pace is closer to historically normal levels,” – he noted.

While prices for detached houses went down by about 10% from a year ago, condo costs keep rising with May numbers reaching the record high level. Nevertheless, the growth pace is already slower. The annual increase by 8.3% reported in May is the smallest in almost 2 years, and sales went down by 16% on a year-over-year basis.

At the same time, we can see market supply growing. According to the federal housing agency, the were 7,691 starts in the first quarter – it’s the largest number since at least 1990. Urbanation expects starts to hit records during the next 2-3 years, as there are high-profile developments planned, e.g. Canada’s tallest residential tower with 92 stories by Frank Gehry.

This tendency can make condos less attractive for investors. “The number of starts is going up and prices growth is slowing, so it may be not so profitable for investors to keep condos”, – Hildebrand says. “In this case, they can start selling”.

Moreover, carrying costs (mortgage payments, property taxes and maintenance fees) already exceed the rental income. Urbanation data shows that the negative monthly cash flow reached C$424 for resale condos in the first quarter of 2017. The deal is that many investors buy properties even before the construction starts, and they have to wait for about 5 years to receive positive cash flow.

Often investors are ready to get negative cash flow in case the prices for such units keep rising. But the central bank says it could be quite difficult to keep the recent prices gains in the future. “If the prices growth slows down, speculators may sell their units quickly, and it will lead to a sharp prices decline”.

“Investors don’t look at real estate in terms of a fast cash flow,” – Robert Kavcic, senior economist at Bank of Montreal, said. “Now they need prices growth to make profits”.

In Hildebrand’s opinion, prices will hardly start falling soon, as the number of unsold units remains low. But investors should be ready for lower profits than in the past.

Builders may start reducing the number of projects amid the slowdown. “They are very careful with new projects, because construction costs are rising sharply, land is very expensive, and there are a lot of uncertainties with approvals under the new planning regime,” – he noted. “That will keep inventory and price under control”.

Nevertheless, any slowdown in condo sector will influence the entire real estate market, which has already faced sales declines and flat annual price gains, according to the Teranet–National Bank House Price Index.