Is a condo bust on the way?

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            OCA site developer not worried about Bank of Canada’s possible market crash warning

OCN staff writer

Is the condo boom about to turn into a costly and economic-threatening bust?

The Bank of Canada says an overbuilt and overpriced condominium market is posing a risk to Canadian households, banks and the economy in general – especially in Toronto.

However, at least one Toronto-based condo developer – who is preparing to pay the Ottawa Construction Association (OCA) $4.6 million to turn the association’s Bronson Ave. site into a planned $90 million development — says the fears are overstated and the real story is that the temporary bulge in condo construction starts reflects market conditions three or four years ago, not today.

He said in Toronto, the historical long term average is about 15,000 or 16,000 units a year.  This bulged to 28,000 – but the fact is “the market has corrected, corrected itself, and has fixed the problem.”

“We can’t build more than 13,000 condos a year,” now, he said.  “Those 28,000 condos normally take about three years to build from start to finish, and close.”

“What’s happened is that (market absorbsion) has stretched to five years – so the units will take 2.5 years to close instead of one.”

Now, he said, Toronto has run out of easy-to-develop land.  “Most of the big stuff, the brownfields, City Place, the Pan Am game site, they are all finished,” he said.  Now the remaining land and sites are suitable for smaller projects — “the markets won’t be able to do 15,000 units.”

“It’s a moot issue,” he said. “Economists are a little behind the wheel. They are getting all excited about housing starts. These were sales done one, two, three or four years ago – they are no reflection of the current economy.”

However, the Bank of Canada says: “If the upcoming supply of units is not absorbed by demand as they are completed over the next 12 to 30 months, the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”

“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations,” the central bank said in its recent financial system review.

A significant price correction in condominium prices could start what it calls a “negative feedback loop,” when plunging house prices bite into net household worth, shatters confidence and consumer spending, in turn impacting income and job creation.

“These adverse effects would weaken the credit quality of banks’ loan portfolios and could lead to tighter lending conditions for houeshold and businesses,” the bank review says.  “This chain of events could then feed back into the housing market, causing the drop in house prices to overshoot.”

However, the bank also says that it is not predicting this unravelling scenario.  It still expects the overall housing market correction to go smoothly.

Lamb, meanwhile, says he expects the market will take care of itself.  He says things may slow down a bit in Ottawa, but that is why he isn’t worried about rushing the OCA’s Bronson Ave. site to market.  “There is a bit of a slow down taking place in the condominium market,” he said.  “We’re not bringing this to the market until the fall or next spring,” he said.

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