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Toronto condo builders taking the safe route, CMHC says

New research from CMHC says condo builders in Toronto are being more conservative in bringing new units to market than they were in the late 1980s, when overbuilding played a big role in the subsequent housing market crash.

Federal agency says current number of unsold units is comparatively low

More than 43,000 condo units were under construction in the Greater Toronto Area in the first quarter of 2016, CMHC says. (Aaron Harris/Reuters)

New research from Canada Mortgage and Housing Corporation (CMHC) says condo builders in Toronto are being more conservative in bringing new units to market than they were in the late 1980s, when overbuilding played a big role in the subsequent housing market crash.

The federal housing agency found that in 2014 and 2015, 79 per cent of condo projects didn't begin construction until they had sold at least 70 per cent of their units. "This high number is in line with a more conservative underwriting approach adopted by most lenders in the past decade," CMHC said.

Some housing market observers have warned that the high number of condos being built poses a risk.

CMHC says 43,860 condo units were under construction in the first quarter of this year. But it says the vast majority of units are sold by the time construction is finished, with only 1,373 units completed but unsold at the end of March. Most of the unsold units are in areas of the Greater Toronto Area where condo markets are more active.

CMHC says the number of unsold units can be an indicator of potential trouble. "Ultimately, as inventories rise, the risks of softening prices can spread from being just a builder specific risk to a wider market risk affecting all builders and homeowners."

In a report two months ago, RBC analysts agreed that so far, the booming market in Toronto has been able to absorb all those new units as there's still strong demand for housing in the downtown core. But if that should change down the line, the bank analysts said the sheer volume of new units could cause problems in the entire market.

'Current inventory level is low'

CMHC market analyst Dana Senagama says condo building in Toronto "seems to be well managed." But she acknowledges that future management of the supply of condos "remains critical."    

"Our research shows that the majority of builders wait until a higher sales threshold is reached prior to commending construction, thus mitigating risks associated with speculative building," CMHC said in its report. "The current inventory level [of completed but unsold units] is low compared to the highs witnessed during the early 1990s."

CMHC says inventory management is necessary to ensure that units currently being built don't remain unsold after they're completed, pointing out that any unit that is started without being sold is being built on speculation.

"If builders were to sell every unit before starting construction, then buyers who bought at project initiation may have to wait a long time (five years or more) to occupy their units," the report says. "On the other hand, with too low a sales threshold, there is a greater risk of an oversupplied market."