www.td.

com/economics

TD Economics
Special Report
May 5, 2009

CRASH AVOIDANCE: TORONTO CONDO MARKET

PULLING OFF A TURBULENT LANDING
Is the Toronto condo market either experiencing or
headed for a crash? Our short answer would be no. Many
conditions present in shattered markets are thankfully lack-
ing in Toronto, from a massive prior run-up in prices to
excessive overbuilding and inventories, to unsound mort-
gage financing practices. While a crash scenario can never
be dismissed entirely, our main conclusion is that the
Greater Toronto Area’s (GTA) condo market is in the midst
of a cyclical downturn rather than a drawn out structural
downturn. Far from academic, we view the difference as
crucial. Among other things, it speaks to whether the down-
turn is expected to be a medium-term affair, a cycle last-
ing say 2-3 years altogether, or a half-decade to a decade
protracted unwind, akin to Toronto’s boom-bust experience
in the late 1980s / early 1990s. In this piece, we refer to
the current ‘cycle’ as having started with Toronto’s latest
housing activity and prices peak in late 2007 - early 2008,
followed by last year’s downturn extending into this year,
and taking into account our forecast for a stabilization dur-
ing the course of this year and a gradual recovery after-

HIGHLIGHTS
• After pulling off what could be best called a not worrisome, …
‘crunchy’ or turbulent landing, but most impor-
• … but a large pipeline of projects already under
tantly avoiding the worst-case crash scenario,
way will boost the supply of new units faster than
the GTA condo market is expected to stay
demand can absorb them.
grounded until a sustained economic recovery
takes hold. • On the flip side, the sharp downsizing in build-
ing intentions and starts will help mitigate the
• Buyer market conditions seemed entrenched
risk of structural overbuilding or a replay of the
as we entered into recession. However, while
late 1980s scenario. While inventories of newly
soft, resale market conditions have not dete-
completed but unsold condos will no doubt be
riorated significantly over the last few months
higher by year-end, we expect units to be ab-
of available data. To the contrary, they have in
sorbed at a decent pace once the economic re-
fact improved, supporting our view that, …
covery takes hold.
• … as argued in a recent report1, conditions are
• The current ultra-low interest rate environment
not expected to mirror those in the U.S., which
also contrasts sharply with that of the late 1980s.
were largely brought on by shaky mortgages
Affordability, a prime consideration for potential
built upon lax credit conditions and chronic
buyers which tends to favour condos vis-à-vis sin-
overbuilding.
gle-detached homes, is improving markedly,
• Current inventories of unsold new condos are sowing the seeds of a recovery in sales.

1
“Annex A: A U.S.-style Housing Crash?”, pages 19-20 of “Overpriced and Overbuilt: Canadian Housing Market Returns to Fundamentals”, TD Economics, April 7,
2009, available at: http://www.td.com/economics/special/gb0409_housing.pdf

Toronto Condo Market 1 May 5, 2009

 www.td.com/economics

HOME AFFORDABILITY* IN TORONTO some sales that would have otherwise occurred later in
Mortgage payment as per cent of income
the cycle. Nonetheless, as a result of this increased avail-
60 ability of new units and a choppy resale market, we expect
55 the median price of existing condos to stay grounded around
50 its latest (March) level of $239,000, in the $230,000-
45 $250,000 range over the next 12-18 months.
40 TORONTO’S ECONOMIC BACKDROP
35
Already well under way, the current cyclical downturn
30 in housing more or less aligns with the overall state of the
25 economy, which is undoubtedly very weak. Furthermore,
20 more weakness in terms or output, employment, income,
Q1.88 Q1.91 Q1.94 Q1.97 Q1.00 Q1.03 Q1.06 Q1.09 and profits lies ahead for much of the rest of the year.
*Of the average-priced home with an average household income under a 5-yr
fixed rate, 25% downpayment, 25-yr amortization.
However, the situation in Toronto has not deteriorated
Source: CREA, Statistics Canada, Bank of Canada. nearly as much as in the rest of the province. The most
relevant illustration of this lies in the employment landscape.
wards.
In the late 1980s, the affordability of homes1 had eroded EMPLOYMENT IN THE 1990-91 RECESSION
significantly, to the point where an average-earning house- 104
Index, t-12 = 100

hold spent more than half their income on mortgage pay- 103 Toronto
ments. In contrast, affordability in the GTA was much 102 Ontario excl. Toronto
better entering the current cycle, with typical mortgage 101
payments consuming less than a third of the typical house- 100
hold income. Buoyed by ultra-low interest rates, improv- 99
ing affordability is the dominant factor that will help smooth 98
out the current cycle by putting a floor under the demand- 97
side of the market. While it is still early days in the current
96
recession, it is also worthwhile noting that, whereas the
95
early 1990s recession left Toronto’s labour market reeling,
94
the current recession has hit the rest of Ontario much harder t-12 t-6 t* t+6 t+12 t+18 t+24
than the province’s capital. All told, we expect 20% fewer * t (month) marks start of recession. Source: Statistics Canada.
existing condo units to change hands this year when com-
pared to last year. EMPLOYMENT IN CURRENT RECESSION
Aside from a generally longer or deeper recession than Index, t-12 = 100
104
expected, which would not be a Toronto-specific event in Toronto
the first place, the single most important risk looming over 103
Ontario excl. Toronto
the local condo market lies on the supply-side. More condo 102
apartments will come onto market in 2009-10 than can likely 101
be absorbed in the midst of a severe recession. As a result
100
of an elevated pace of condo starts in quarters past, re-
flected by a large number of units still under construction 99

that will come online, we estimate that the inventory2 of 98

unsold new condos will increase to 3.5-4.0 months supply,
97
albeit from a very low 1.7 months as at March. The re-
96
cently announced transition to a single sales tax for On-
t-12 t-6 t* t+6 t+12
tario by July 1, 2010, is likely to see a front-loading of new
* t (month) marks start of recession. Source: Statistics Canada.
condo sales between now and then, in effect displacing

Toronto Condo Market 2 May 5, 2009

 www.td.com/economics

Since the advent of the current recession in November

APARTMENT SALES-TO-LISTINGS - GTA
2008, employment in Ontario when excluding Toronto has
Per cent
fallen by a whopping 4.0%. Meanwhile, the provincial un- 200

employment rate has surged by 2 percentage points to 8.7% 180

even as the labour force shrank by 0.4%. Digging down 160

to the local level, however, reveals that net job losses have 140

been much more acute in areas outside of Toronto such as 120

Thunder Bay, Oshawa, Kitchener, and Windsor, as mining 100

and manufacturing sector woes have hit these local econo- 80

mies hard. By comparison, employment in Toronto is down 60

0.7% during the same time period. Toronto’s unemploy- 40
ment rate has nonetheless increased by a substantial 1.9 20
percentage points, to 8.8%, but this has largely resulted 0
from strong labour force growth of 1.5% over the five Q2.98 Q2.00 Q2.02 Q2.04 Q2.06 Q2.08

months elapsed since October of last year. This is not to Source: CREA. Last data: Q4.2008.

say that Toronto’s economy will be left unscathed by the

current recession, as more hardship surely lies yet ahead. EXISTING HOME PRICE - GTA
However, recall that in the recession of the early 1990s, $
450,000
the city’s employment fell off by nearly 6%, a scenario
which looks unlikely to be repeated. We expect local em- 400,000
ployment to fall by roughly half of much, or 3%, this time Average, all unit types
350,000
around. Economic activity in the GTA should pick up be-
fore employment, however, towards the fourth quarter of 300,000
this year and maybe as soon as the third quarter as finan-
cial markets anticipate a modest North American recov- 250,000
Median, condo apartments
ery for 2010.
200,000
RESALE MARKET CONDITIONS
150,000
The most encompassing measure of resale market con- Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
ditions, provided by the sales-to-new listings ratio, reflects Source: CREA.
well the steep softening in market conditions that occurred
throughout last year, and the subsequent firming up since
RESALE MARKET CONDITIONS - TORONTO then. The condo market itself was no different, and seemed
to have gone through much of the above-mentioned trends,
Ratio of sales to new listings (all units combined)
1.0 as its sales-to-listings ratio slumped in the second half of
0.9 Seller's market last year, and sales plunged by nearly 50% year-over-year
0.8 in January. Sales did firm up slightly in February and March.
0.7 However, condo apartment sales in the first quarter of this
0.6 year were still 31% lower than the same period last year.
0.5
Balanced This would be consistent with the trend observed in the
0.4 monthly median3 price series of condo apartments in the
0.3 GTA, which saw the 6.1% year-over-year decline recorded
Buyer's market
0.2 in November 2008 ease to a 1.8% year-over-year decline
0.1 in the first quarter.
0.0 We expect markets to remain quite choppy between
Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
now and the end of the recession as two important forces
Source: CREA. Last: March 2009.
run in opposite directions until then. On the one hand,

Toronto Condo Market 3 May 5, 2009


GTA RESALE MARKET
Annual units sold Annual units sold
100,000
90,000
80,000 Total (all units types)
70,000
60,000
50,000
40,000
Condo Apartments
30,000
20,000
10,000
0 0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10f
Source: CREA, f: Forecast, TD Economics, April 2009.
employment and incomes will continue to slump until the
economy recovers next year, and this will weigh on home
and condo demand directly as well as indirectly through
overall consumer confidence. On the other hand, better
affordability allows many homeowner households to up-
grade and many potential new homebuyers to jump in. This
is usually reflected in market conditions that hover back
and forth between buyer conditions and balanced condi-
tions as listings also respond with a lag to price trends. As
seen in the chart below, when compared to the record sales
levels registered in 2007, our forecast sales volumes for
2009-10 will be significantly lower. On the other hand,
they are not expected to dip below 15,000 condo apart-
ment units on a sustained basis. As a result of good avail-
ability of existing units, we expect the median price of ex-
isting condos to stay grounded around its latest (March)
level of $239,000, in the $230,000-$250,000 range over the
next 12-18 months. Note that by construction, because of
the price distribution of units, the median price tends to be
much lower and much less volatile than the average price.
This fact holds true both on the upside and the downside.
We do not have the average price for existing condo units,
but the overall average price across all unit types –mainly
condo apartments, row and townhouse units, single-de-
tached and semi-detached homes – for the GTA is ex-
pected to hit a trough about 20% lower than its peak of
$410,000 in December 2007. For existing GTA condo apart-
ments, the median price is expected to hit a trough roughly
7% lower than its June 2008 peak of $248,000.
As sales stabilize later this year and eventually firm up
in tandem with the overal economy, the demand-side of
Toronto Condo Market
www.td.com/economics
the market should be well supported. The challenge will
most likely lie on the supply-side, specifically that for new
25,000 units, to which we now turn our analysis.
NEW CONDOS – WHAT’S ON TAP?
20,000
The Toronto condo market is often and anecdotally al-
15,000 leged to be a focal point of overbuilding. What does the
available data say on this issue? Up until 2008, the pace of
10,000 multiple unit starts seemed reasonable. Thus far, invento-
ries of newly completed but unsold multiples have remained
5,000 low relative to historical levels. While backward looking,
this reflects the fact that most newly built condos coming
onto the market have generally been absorbed, which is no
surprise given the strength of past demand and that most
projects can only obtain the go ahead if a large proportion
of units are pre-sold.
However, a recent surge of building, reflected in a high
number of units under construction, will likely tilt the new
condo market balance more clearly in favour of buyers as
many units come onto the market over the course of the
year. The last twelve months of available data on starts of
condo apartments, running from April 2008 to March 2009
show that the monthly pace of building has exceeded the
average pace of 2005-07 by a significant 63% margin. Of
particular concern is the third quarter (Aug-Oct) boom
during which a total of 9,300 units were started. A longer-
term first pass comparison of the annual number of apart-
ment starts suggests that 2008 witnessed the largest scale
of activity by far since the mid 1980s, but this is over-
stated. When looking at housing starts over extended pe-
riods of time, one has to adjust these levels to reflect popu-
lation and household growth, as well as the evolution in
TORONTO STARTS, CONDO APARTMENTS
30,000
Annual starts, units
Forecast
Adjusted for
25,000
population and
ownership rates
20,000
15,000
10,000
Actual
5,000
0
86 89 92 95 98 01 04 07 10f
Source: CHMC, Statistics Canada, f: Forecast by TD Economics.
4 May 5, 2009
 www.td.com/economics

ters of this year would yield a total of nearly 18,000 units.

MONTHLY APARTMENT STARTS
This would still imply 35% fewer units built over 2007-09
Units
4,500 when compared to 1987-89. To be clear, that simple ex-
Average Q2.05-Q1.08
4,000
Q2.08-Q1.09
trapolation is used for illustrative purposes and does not
3,500 Q1.08 constitute our forecast, which we would set at a signifi-
3,000 cantly lower level of 11,000-13,000 units, roughly half as
2,500
many units as last year. In particular, while the monthly
series for apartments is highly volatile, we view the bounce
2,000
back in March as a temporary blip that is not likely to ex-
1,500
tend into the second quarter or beyond. Admittedly, much
1,000
can happen over the rest of the year, but most of the finan-
500 cial market and economic woes suggest more downside
0 than upside risk.
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Using the number of condo apartment units currently
Source: CMHC.
under construction, our baseline forecast for starts, as well
as prudent assumptions on the rate of completion of projects
CONDO APARTMENTS UNDER and the rate of absorption of new units, we estimate the
CONSTRUCTION
45,000
Units path of new unsold condo inventories – as measured in
40,000
months of supply – over the next twelve months. We find
Adjusted for
population and
that the increase would be significant, from 1.7 months as
35,000
ownership rates of March to 3.5-4.0 months a year hence, but the actual
30,000
level is not alarming. While we unfortunately do not have
25,000
figures for what inventories were according to this meas-
20,000 ure in the late 1980s, we do know that the unsold inventory
15,000 at the beginning of the series in January 1992, or a full two
Actual
10,000 years after markets dipped, was still a hefty 3,000 units.
5,000
This would roughly the equivalent of 5,000 units under to-
day’s market size, closer to 5 months of supply. The in-
0
86 89 92 95 98 01 04 07 ventory peak could easily have been double that, and would
Source: CHMC, Statistics Canada, TD Economics. occurred sometime around mid-1990 when sales hit bot-
tom and construction had been plowing ahead at full steam
households’ propensity to own a home as opposed to rent-
ing, a concept best approximated by actual ownership rates INVENTORY OF UNSOLD NEW MULTIPLES
from Census data.4 After this adjustment, we observe that
Unabsorbed units
the apartment building boom of the late 1980s was larger, 3,000

but that 2008 came close to matching its 25,000 + units

2,500
annually. The main difference is that over the 3-year span Average since Jan.07 = 686 units
of 1987-89, the equivalent, in today’s terms, of nearly 81,000 2,000
units were built. Meanwhile, during 2007-08, close to 35,000 Long-term average = 985 units
units were built. Even if one assumes that condo building 1,500

were to continue this year at the frantic pace of nearly

1,000
24,000 units set last year, this would imply a cumulative
59,000 units being built over the 3-year span of 2007-09, 500
28% fewer than in the late 1980s. Year-to-date, however,
the 3,800 units pace of apartment starts established in the 0
Jan-92 Jan-97 Jan-02 Jan-07
first quarter is 26% lower than that of the same period last
Source: CMHC. Last data: March 2009.
year. A simple extrapolation into the remaining three quar-

Toronto Condo Market 5 May 5, 2009

 www.td.com/economics

INVENTORY OF UNSOLD NEW UNITS NEW HOUSING PRICE INDEX - TORONTO

Months supply of multiples (row, apt & other) * Index, 1997=100
8.0 150

7.0 140
Forecast 130
6.0
120
5.0
110
4.0
3.5
100
3.0 90
2.0 80

1.0 70

60
0.0
1992 1995 1998 2001 2004 2007 2010 50
Feb-81 Feb-86 Feb-91 Feb-96 Feb-01 Feb-06
* Calculated as ( Completions + Unabsorbed Inventory ) / Absorptions,
3-month average. Source: CMHC. Calculation and forecast byTD Economics. Source: Statistics Canada. Last data: Feb. 2009.

during the previous three years.

NEW APARTMENT CONSTRUCTION
In the near-term, much will depend on how supportive PRICE INDEX - TORONTO
sales are or not in keeping projects in the pre-construction Y/Y % change
15
phase on track. Whatever excess inventory builds up be-
tween now and the end of the current recession will cer-
10
tainly weigh down on prices for a while, but in and of itself
does not, in our view, put the market at an elevated risk of 5
a disorderly correction. The inventories would also pale in
comparison to the pile-up witnessed stateside, where a 0
surge in foreclosures has pushed the months’ supply of
inventory in double-digit territory and is, by far, the largest -5
supply glut since the data was collected in the 1960s.
While it would weigh on current economic activity, the -10
extent to which builders heed current market signals and Q1.89 Q1.92 Q1.95 Q1.98 Q1.01 Q1.04 Q1.07

pare back activity sharply would serve to minimize the risk Source: Statistics Canada. Last data: Q3.2008.

of this cyclical downturn turning into something far more

ditions, which we doubt they could, given the aforemen-
painful and protracted. The latter certainly has been known
tioned incentives, and continue to build condos at an el-
to happen, but does not currently appear to be the more
evated pace, they would collectively be sowing the seeds
likely outcome. Among other things, new housing price
of a structural overbuild in 2010 and beyond which would
and apartment construction cost trends are simply not sup-
consequently take for more time to unwind.
portive of a continuation of the condo building boom. On
the other hand, if builders ignore market and financial con-
Pascal Gauthier, Economist
416-944-5730

Toronto Condo Market 6 May 5, 2009

 www.td.com/economics

Endnotes

1
Readily available price data by unit types, in our case of interest for condominium apartments, starts in 1993. To go back to the 1980s, we use
the average price across all unit types, arguably without much loss of specificity with regards to affordability trends.
2
Our measure differs from the CMHC measure, see accompanying chart for calculation. CMHC calculates months of inventory as the
unabsorbed inventory divided by absorptions from this inventory, whereas we calculate this as the sum of completions and unabsorbed
inventory divided by total absorptions. This is done in order to provide a more encompassing measure that keeps track of absorptions from
the entire stock rather that just from the unabsorbed inventory, and is more readily comparable to U.S. measures.
3
The price measurement reported by the Toronto Real Estate Board (TREB) – and in turn the Canadian Real Estate Association (CREA) – once
we look at specific unit types (e.g. condos, single-detached) is the median price. The latter tends to be less volatile than the average price, which
is more influenced by swings in sales volumes dispersed at the high and low end of the price spectrum.
4
These are given every five years, which is the frequency of Census data. For simplicity in obtaining annual ownership rates for years in between
Census years, we interpolated linearly.

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may
not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank
Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its
business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not
guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and
financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and
uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities
that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained
in this report, or for any loss or damage suffered.

Toronto Condo Market 7 May 5, 2009