Who better to promote Toronto’s slumping condo market than the Material Girl.
Madonna, whose 2012 tour was the top-grossing act of the year worldwide with $296.1 million in revenue, will lead an “Addicted to Sweat” dance class next month at her Hard Candy Fitness studio inside Aura, a new 78-story condo tower in Toronto. The luxury development will also feature a sculpture-studded public gallery, a marble-lined lobby and a five-bedroom penthouse priced at C$18.4 million ($17 million).
Aura, Canada’s tallest condo, is a monument to Toronto’s 10-year building boom. The glass tower, with 985 apartments, is contributing to the 20,000 units set for completion in 2014, a record annual surge. And a total of 60,000 units are under construction in Toronto. The building spree that began in 2004 has already created at least 125,105 units and about 600 high-rises, including conversions, transforming the skyline of Canada’s biggest city.
Now, as condo sales tumble and price gains slow, supply may soon outrun demand. New condominium sales in the city of 5.6 million people fell 8 percent to 3,049 during the third quarter of last year from a year earlier, about 25 percent lower than typical third quarter totals over the past decade, according to Urbanation Inc., a Toronto-based real estate research firm. Prices rose 2 percent in the third quarter compared with the same period in 2012. That’s the slowest annual growth in eight years, according to Urbanation.
The Aura condominium building, left, is under construction on Aug. 23, 2013.
Overshooting Market
“It is very likely that we’re overshooting,” said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce. “When you have this extra supply entering the market, that’s when it will be tested.”
While Toronto’s condo market cools, property prices for the country are poised in 2014 to continue their upward tear. The International Monetary Fund called Canada’s housing market the most overvalued among countries belonging to the Organization for Economic Co-operation and Development in a Nov. 26 report. Prices in Toronto have risen 39 percent from December 2008 to the end of 2013, according to Canadian Real Estate Association data.
Average Canadian home prices, including houses and high-rises, gained 12 percent to C$561,328 in December 2013 compared with the year ago period, according to data compiled by Bloomberg from regional real estate boards. Prices in December advanced 8.9 percent in Toronto and 11 percent in Vancouver. That compares with a 4 percent gain in New York in the third quarter, according to the city’s board.
A floor plan for the Aura condominium project is displayed with a "sold out" sign.
Price Gains
“The average selling price in Canada will be up again in 2014 and by more than the rate of inflation,” Jason Mercer, senior manager of market analysis at the Toronto Real Estate Board, said in a Jan. 6 data release.
Low borrowing costs and a scarcity of single-family homes have driven Canada’s market to record highs. The country’s benchmark interest rate has been at 1 percent since 2010, the longest pause since the 1950s. The weekly three-year conventional mortgage has been below 4.05 percent since Sept. 26, 2012, according to Bank of Canada data.
Investors don’t expect the country’s overnight rate to rise this year, according to trading in overnight index swaps. Canadian inflation is projected to remain below the 2 percent mid-point of the Bank of Canada’s 1 percent to 3 percent target range through 2015, according to analysts’ estimates compiled by Bloomberg. The overnight index swap shows the market’s expectation for the one-year average central bank rate beginning in one year’s time.
Tighter Rules
Cheap mortgages and hefty house prices have helped push Canada’s debt to disposable income ratio to a record 165.75 percent, according to Statistics Canada quarterly data as of Sept. 30. It’s also above the historical average of 133.99 percent.
“Elevated levels of household debt and high valuations in a number of housing markets remain a potential vulnerability,” the IMF said in its report.
Finance Minister Jim Flaherty said on Jan. 5 that the government would tighten mortgage rules again “if we have to.”
Flaherty attempted to douse the market four times in the last five years, with the most recent move in June 2013. He cut the maximum amortization period on mortgages the government insures to 25 years from 30 years and lowered the maximum amount homeowners can borrow against the value of their homes to 80 percent from 85 percent. The Office of the Superintendent of Financial Institutions also introduced tougher standards for lenders.
Flaherty sees the housing market cooling as the stiffer mortgage-lending rules slow borrowing.
Construction Jobs
Housing continues to add to the economy. Construction jobs increased 1.9 percent in December from the year-ago period, and employment in the financial sector, including real estate and leasing, gained 1.3 percent in the same time period as total unemployment increased, Statistics Canada said in Ottawa today. The weaker job market, tepid exports and sluggish business investment are hampering economic growth as the housing market continues its advance.
Phil Soper, chief executive officer of Brookfield Real Estate Services in Toronto, said he doesn’t expect more housing regulation.
“I’d say there’s still room for prices to grow,” Soper said. “We have to be very careful with intervention because if it’s a little too heavy we could kill the goose that laid the golden egg.”
Crash Unlikely
In Toronto’s condo market, the slowdown probably won’t lead to a crash. About 96 percent of the 20,000 condo units set to hit the market this year are already pre-sold, said Shaun Hildebrand, senior vice-president at Urbanation.
About 60 percent of Toronto condo buyers are investors. Most of them will hold onto their units if they have trouble selling, and possibly rent them, rather than drastically drop the sale price, Hildebrand said.
Tal of the Canadian Imperial Bank of Commerce, said a constraint on land in Toronto that’s driving up the price of detached houses is keeping demand for condos from disappearing.
“It’s a market that will correct,” said Tal, who estimates that condo prices may fall up to 15 percent in Toronto this year. “Sales are already sliding down, dramatically in fact. Prices will eventually follow suit.”
At Aura, workers are now putting the finishing touches on the penthouse suites, which start at C$1 million. Montreal-based Canderel Inc., the building developer, began selling condos in the tower in around 2008 and about 99 percent of them are purchased, according to Riz Dhanji, vice-president of sales and marketing at Canderel’s residential group. The penthouses are the only units still up for grabs.
Madonna’s Studio
Madonna, who cofounded Hard Candy Fitness, has locations in eight cities including Berlin, Moscow and Sydney. The performer will appear at Aura on Feb. 11 with condo owners selected to try out for the fitness class. The appearance may help sell those penthouse units, said Dhanji.
“We’re very excited to have Madonna’s gym,” he said. “We’ve had incredible interest in the building’s remaining units, especially the penthouse suites. This will only draw more attention to that as suite owners get access to this world class gym.”
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