July 11, 2011 / 7:28 PM / 6 years ago

Analysis: Condo boom may avoid crash on demographics

5 Min Read

<p>Condominiums are seen under construction in Toronto, July 10, 2011.Mark Blinch (</p>

TORONTO (Reuters) - Canada's booming condominium market, which has filled the skylines of its biggest cities with cranes and prompted a warning from its central bank, may well avoid the type of crash that has hobbled the industry in the past.

While inventories of unsold condominiums are trading well above historically averages, industry executives and analysts say demographics, immigration and limited land in the biggest markets all provide long-term support.

With C$500,000 ($515,464) fixer-upper homes out of reach for many Vancouver and Toronto home buyers, condos also remain their only route to property ownership.

"I get asked with all those cranes in the sky, is there going to be a glut of supply? But if you look at the city planners' projections for demand versus projects on stream, we still don't have enough condominium projects underway in our big cities," said Phil Soper, chief executive of Royal LePage, one of the country's biggest real estate brokerages.

The condominium boom is part of a broader Canadian housing sector surge that followed the global financial crisis, in sharp contrast to the still struggling U.S. market.

After taking a brief hit, home prices and sales jumped as the Bank of Canada cut borrowing costs to a record low. Canadian banks, which escaped the crisis largely unscathed, were easily able to keep loans flowing.

Data on Monday showed Canadian housing starts for June surged well past market expectations. The multiple-unit dwellings category -- mainly condominiums -- accounted for the majority of starts in urban areas.

Supply is growing. BMO Capital Markets recently noted inventory of completed but unoccupied multi-dwelling units at 12,672 units in May, around historical highs, compared to 4,757 for single-family homes.

Elevated levels of unsold condos were one factor prompting Bank of Canada Governor Mark Carney to warn last month about "the possibility of an overshoot in the condo market in some major cities.

Developers, Banks Learn Hard Lesson

But analysts said the building surge reflects changing demographics and evolving cities. In addition to first-time homebuyers, condos have also become popular for retiring baby boomers.

Immigration has also underpinned the rapid build-up. The booming market is concentrated in the heavily populated and pricey cities of Vancouver and Toronto, destinations for many of the more than 200,000 people who move to Canada each year.

Analysts attribute part of the condo boom in Vancouver and Toronto to physical and regulatory land restraints, which have changed the mix of housing to more stacked high-density communities from the traditional single-family home.

"It has shift over the last several years. Now it's about 50/50, which some people are concerned about. I can't say I am," said Robert Hogue, senior economist at Royal Bank of Canada.

"I just see this as a reflection of where our major cities are at in their own life cycle."

Recent Royal LePage data actually showed the pace of price gains in standard condominiums paled against detached bungalows and two-story homes.

Banks and condo developers, particularly in Toronto, also appear to have learned hard lessons from the 1980s, when many built with insufficient regard for demand and got slammed as interest rates climbed.

Analysts say very few shovels these days break ground until the developer has sold at least 70 percent of the project and has secured bank financing.

"It's a very well-disciplined supply-side of the equation," said George Carras, president of RealNet Canada, which tracks commercial and new home projects.

Carras noted building high density housing is a natural progression for a growing city with limited room to expand outward.

Rising Rates in Question

Still, many in the industry are wary about the outlook for interest rates. The Bank of Canada tightened three times last year. Forecasters are divided on whether the next rate hike will come this year or next.

Carney himself and many industry executives predict the broader housing sector will cool as demand is eventually dampened by higher borrowing costs and other factors.

But some warn the housing boom of the past few years will not end well -- which could hit the high-growth condominium sector particularly hard.

David Madani, Canada economist at Capital Economics, expects a cumulative 25 percent decline in the national average price over the next three years as income and population growth fail to keep pace.

"There's a really large disconnect between house prices and the fundamentals. We don't think that this is sustainable," he said.

($1=$0.97 Canadian)

Editing by Jeffrey Hodgson and Frank McGurty

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