Article on the expected, or according to McLeans, in the progress housing “crisis” in Canada:
It’s not just Vancouver where realtors’ BlackBerrys no longer buzz. In Toronto, the city’s once insatiable demand for living in 650 sq.-ft. glass boxes has evaporated overnight. Condo sales are down by 30 per cent, while prices have fallen by 4.5 per cent. Some proposed projects have been put on hold, while some angry investors—like those who bought luxury suites at the Trump International hotel—are desperate to get their money out, and have turned to the courts. Even the Bank of Canada, which has helped inflate the bubble by tempting Canadians with years of rock-bottom interest rates, has issued a rare warning about the risks posed to the broader housing market of too many condo developers in cities like Toronto and Vancouver chasing too few buyers.
Summing up the entire article,
In such a scenario, the homeowners most at risk are those who are overextended. Of the $570 billion in mortgages that the CMHC insures, about half are borrowers with less than 20 per cent equity in their homes. “If housing lands hard and affects the broader economy, many people will find themselves effectively underwater at a time when they would most need mobility to pursue employment,” Rabidoux says. “In this scenario, a house becomes a prison.” And it’s not necessarily condo buyers or those who paid over a million to live in a hot downtown neighbourhood who are most at risk. Rabidoux says people who shelled out for sprawling “McMansions” in the suburbs could be in particular trouble, as the demand for oversized homes is expected to fall out of favour when baby boomers retire and seek out smaller living spaces closer to the city. Indeed, that’s precisely what happened in the U.S., where some estimates peg the number of unwanted “large-lot” homes at about 40 million across the country. As for smaller houses, Andrew says there remains a shortage of single-family homes in cities like Toronto and Vancouver, which should keep demand relatively high. “If you are buying a three- or four-bedroom house right now, then I think you’re going to be okay,” he says.
Actually, the above is a valid point. I was recently having discussion with an acquaintance, and they purchased a house in the suburbs, with 2500 sq ft, and one hour commute to downtown Toronto, the couple paid a whopping $650,000. That is a handsome sum of money, and significant for most families, especially when the economy seems on shaky footing.
One of the gravest mistakes is to get into investments because the interest rate is too cheap, even though the investment itself may not have that much great rate of return. Real estate investment (such as a house) maybe worthwhile if the purchaser will be living in the dwelling himself/herself, and would be able to afford the dwelling even if they lose the job for 6 months. Such a purchase should not be purchased with the end in mind of renting the unit or capital appreciation, as the softening of the market would decrease the rent and the price, both at the same time. The article notes this point quite eloquently;
The concern is that the market is being driven by speculators, not families. Many condo purchasers buy off a floor plan—often borrowing against an existing property—and then sell or rent their unit once it’s completed several years later (units can also be sold, or “assigned,” to another buyer while a tower is under construction). “So far, the demand for units and supply has not been too far out of balance,” says Ohad Lederer, an analyst at Veritas Investment Research, citing estimates that investors comprise half of the Toronto condo market. “And that’s reflected by a relatively robust rental market. But I’m definitely concerned that, over the next couple of years, an imbalance will emerge.” It’s happened before. In Miami, a pre-2008 condo boom left 7,000 new units unoccupied after the crash. The upside? College students could suddenly afford to rent swanky suites with granite countertops and ocean views.
Lederer recently sent secret shoppers to several condo sales presentation offices. They made some disturbing discoveries: sales staff who didn’t ask for mortgage pre-approvals and who grossly misrepresented the demographic trends—namely the number of expected new immigrants to Toronto—that are supposed to keep units in high demand. But Lederer says he is most disturbed by the sector’s “shoddy mathematics.” By his calculations, many condo owners who rent their properties are realizing returns of less than four per cent. If rental rates fall as more units come on the market—Lederer estimates there are at least 5,000 too many condo units being built in downtown Toronto—those same investors will soon be losing money, prompting them to sell. “Being a landlord is already a negative cash proposition at today’s prices,” he says, adding that a bust in the condo sector will likely have a “trickle up” effect by reducing demand for starter homes.
With discussion with multiple friends working in the finance industry, majority seem to agree that it is best to get into real estate, as “real estate always goes up”. Lets hope they are right!
You can read the full McLeans Article here.