Condo prices in Toronto and Vancouver are rising at an astronomical rate
The Bank of Canada says condos have become the latest target of real estate speculators, making them a more risky investment.
In its recent financial system review, the Bank noted that housing markets in many Canadian cities have reversed themselves. After years of single-family homes rising in price faster than condos, condo price is now rising rapidly as the detached home market cools.
"This greater activity — even as carrying costs (including mortgage payments, property taxes and maintenance fees) have increasingly exceeded rental revenue — suggests that investors have been counting on a continuation of large price increases," the bank wrote. In other words, the condo market is now in the thrall of real estate speculators.
Even with the introduction of foreign buyers’ taxes and the new mortgage rules reducing demand, condo prices continue to rise, showing that something other than market fundamentals is driving them forward.
The report states that in B.C.’s Fraser Valley, condo prices have been soaring at an annualized rate of 60 per cent in recent months.
The benchmark price for a resale apartment in Greater Vancouver has jumped by 20.5 per cent over the past year, compared to 2.4 per cent growth for detached homes.
In Toronto, condo prices have softened in recent months, but they are the only type of residential real estate to record a price increase over the past year — up 5.7 per cent in the past year, even as detached homes fell by 8.2 per cent.
Markets that are driven higher by speculation are at greater risk of a bust, the Bank argued.
"Prices that are inflated because of these types of expectations tend to be more sensitive to adverse shocks. If expectations reverse and prices recede, speculators may quickly sell their assets, which could lead to large, rapid price declines, with adverse consequences for the rest of the market."
The Bank of Canada isn't predicting a bust-out for condo markets — it's simply saying the risk is heightened. But it is predicting that the rapid price growth seen over the past year will not continue.
"The number of condominiums under construction is at or near record highs in both (Toronto and Vancouver), suggesting that it may be difficult to sustain the recent pace of price gains over the longer term," the Bank's review stated.
Overall, the bank found little change in the risks to Canada's financial system since its last review in November, reiterating that high household debt, housing market "imbalances" and the threat of cyberattack are the three areas keeping the Bank's policymakers up at night.
"But the Canadian financial system is resilient, and its ability to manage negative shocks is being further improved by new policy measures," the Bank stated.
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