Investors rushed to buy Toronto condos in the good times, now there is a worry that they will rush for the exits as the economy weakens and they realize that profits are hard to come by in an overbuilt market.
A record number of condos were built in the past year in the Greater Toronto Area, with some 43,000 units under construction. Anecdotal evidence suggests many of the units were sold to investors who plan to rent them out, but a flood of supply hitting the market at once could drive rents below what's needed to generate a profit.
Bank of America Merrill Lynch said if this happens, expect investors to slap "for sale" signs in the windows. And they won't be selling for a profit, which will drag down prices for anyone else in the city putting a place on the market.
In a city accustomed to more than a decade of predictable price gains, the bank's worst-case-scenario call of a 15 per cent price drop over the next two years is an uncomfortable proposition for many who count their homes as their financial asset.
"What drives this housing cycle up inevitably drives the market down," economist Sheryl King wrote in a report. "We estimate there are already enough units in [Toronto]to satisfy fundamental demand for the next five years ... our estimates indicate there will not be enough renters in Toronto to occupy these units as they are completed."
Toronto's boom has been fuelled by several factors. Land use restrictions have encouraged vertical growth, and the price of standalone housing has exploded in recent years. The average detached house in the 416 area code sold for $708,993 in the first two weeks of December, the Toronto Real Estate Board said. The average condo sold for $359,206.
Merrill Lynch isn't alone in its concern – in its December economic update, the Bank of Canada noted a "heightened risk of correction" in the condo market.
"Certain areas of the national housing market may be more vulnerable to price declines, the bank said. "Particularly the multiple-unit segment of the market, which is showing signs of disequilibrium."
Builders, however, maintain the market is robust and suggest many who issue dire warnings are underestimating demand. While some suggest up to 60 per cent of all city condos are bought by investors, Tridel Group of Companies senior vice-president Jim Ritchie said his numbers suggest no more than 15 per cent of buyers are looking for an investment.
No reliable statistics are kept, which is one of the main reasons analysts often disagree about the market's direction. It matters – homeowners are less likely to sell if prices drop because they aren't looking to make a quick profit. If they hold on through any volatility, prices are less likely to fall sharply.
"As an industry, we're getting pretty accustomed to people telling us that things are out of control and unsustainable," said Mr. Ritchie, whose company plans to build eight new condo towers next year. "If this market had sprung up overnight, then maybe I'd understand. But this has been a solid contributor since 1967, and has been doing well for the last 10 years. This is not a blip."