* Players in condo market deny bubble, but admit worries
* Building boom continues, though softening seen
* Tighter financing reassures some
By Andrea Hopkins
TORONTO, June 11 Each panelist at a recent
Toronto real estate conference had a reason why the city's condo
market is not a bubble. But the developers, the lender, the
receiver, the marketer and the real estate agent each talked
about the things that worry them.
"Everyone is uncertain about what is going to happen in the
condo market in the next few years," said Steve Gagro, a senior
manager at Laurentian Bank of Canada who specializes in
lending to real estate developers.
With 325 condominium projects on the market and another 173
towers under construction, Toronto's skyline is spiking with
condo units and cranes, with more new buildings underway than in
any other city in North America.
The building boom and 15 years of rising prices have stirred
worries about a real estate bubble in Canada's largest city,
where historically low interest rates have encouraged buyers to
take on more household debt than ever.
Industry stakeholders stress that the potential for a crash
is slight, and most of the talk at the Queen's University
seminar was about the strengths of the market.
But as construction cranes swiveled outside the windows, the
discussion repeatedly circled round to the danger signals that
have become impossible to ignore, similar to pilots explaining
why they are packing parachutes to take onboard.
The developers talked about tighter financing and
affordability. The real estate agent wondered about a growing
gap between new condos and the resale market. The bankruptcy
specialist worried about high supply and few players. The
salesman talked about skittish investors and bad press.
While it sounds like Canada may be importing the 2008
housing bubble from its neighbors to the south, nearly everyone
in the industry argues that Canada is different.
It did not suffer the financial crisis the rest of the world
did in 2009, mortgage interest is not tax deductible as in the
United States, mortgages are not repackaged and resold among
lenders, and there is very little subprime market.
The market, too, is different.
"Demographics does an awful lot to support this condo
market," said Jim Ritchie, head of sales and marketing at Tridel
Corp, one of Toronto's largest condo developers.
Toronto, with an area population of 5.8 million, accepts
about 100,000 new immigrants every year. The bulk of them are
from countries where dense urban living is common, and a
hard-to-determine number of foreign buyers are helping to prop
up the market.
Efforts to encircle the city with a green belt of
undeveloped land has limited some of the sprawl, creating a
virtual island that mimics pricey real estate centers like
Manhattan, Hong Kong and Singapore.
Mortgage rates that start at 2.4 percent and don't rise
beyond 6.75 percent have boosted affordability, especially
compared with pricier single-family homes. The average condo
price is C$368,000 (US$378,000) less than half the C$821,000
(US$844,000) it costs to buy a house.
But even developers who say there is no bubble speculate
publicly about what will happen when the boom starts to cool,
and everyone appears braced for bad.
"Condominium development is good, it's part of our
business," said Ben Rogowski, executive vice president of
developer Canderel Group. "If a year from now it is not good, we
have lots of other skill sets and we will focus on a different
part of the business until we feel that it is there again."
Canderel is focused on inner Toronto and has no plans to
"I think we will continue to focus on downtown, because when
things do change, they probably will fall from the outside in.
In our opinion ... the margins will still be ... downtown,"
LENDERS ON A LEASH
There is little question that concern about the Canadian
housing market is making its way from the corridors of power in
Ottawa to the big banks, which hold the purse strings for both
developers and home buyers.
"I believe the uncertainty (about the condo market) is
increasing potential risk associated with lending," said
Laurentian Bank's Gagro.
A banker who specializes in lending money to real estate
developers, Gagro said Canada's banking regulator, the Office of
the Superintendent of Financial Services, has been making the
rounds of Canada's big banks to make sure they are not making
bad loans that will bring the industry closer to a bust.
"Over the last little while OSFI has come in and shaken the
chain a little bit with respect to condo exposures, so everyone
is a little more cognizant of who they are dealing with and how
they are structuring the deals," said Gagno. He noted that
developers must typically sell at least 80 percent of units in a
project before construction can begin.
"Banks are going to be selective about who they are dealing
with ... how deep their pockets are, their ability to respond to
financial obligations, a demonstrated track record and being
able to bring projects to market," he said.
The tighter financing reassures Ray Drost, senior vice
president and partner at Ernst & Young Real Estate Services, the
team called in when bankruptcy threatens a developer or a
project and restructuring must be done.
"Our restructuring practice is probably the largest in
Canada and I can tell you we've been called on one project in
the last 36 months - one," he said.
Drost says a huge pipeline of supply is one concern, but
believes the big players will weather a cooling in the market.
"I think it will slow down but I don't know if we're going
to see a lot of failures, frankly," he said, noting he has lived
through several corrections and knows the signs.
"I think probably the ones you will see or hear about are
smaller developers who haven't managed their marketing well,
that have maybe cut corners where they shouldn't have, and have
not really matched up the project to the target market."
A final concern is whether projects are being rushed to
market before interest rates rise or consumer confidence
retreats. New starts of urban Canadian condo projects dropped 21
percent in May, nearly reversing a 27 percent increase the
previous month, and remain well above historical averages, the
Canada Mortgage and Housing Corp said on Fr ida y.
But the threat of higher interest rates has been raised so
often and for so long that no one is sure how much attention to
pay to the risk of slightly higher borrowing costs in 2013 or
Tridel's Ritchie sees mixed signs, with investors looking to
flip condos or rent them out more worried than younger buyers
who cannot believe Toronto real estate will ever be a losing
"We have a lot of people in our buyer profile who have never
experienced anything but an up market - so they keep coming back
to the trough, so to speak," Ritchie said. "But it doesn't
always work that way."