Condo Crazy: Canadian Edition

I’m here in Vancouver for Agora’s Financial Symposium, where there will be plenty of discussion of booms, busts and stagnation. Watching BNN this morning, Canada’s version of tout TV, a message crawled along the bottom of the screen: “RBC: Toronto, not in a condo bubble.”

Fears of a condo bubble in Canada’s biggest housing market are overblown, according to a new report from the Royal Bank of Canada written by economist Robert Hogue. He says that demand in Toronto is in line with supply; Toronto’s condo building frenzy over the last few years is mainly a response to the steep drop in new single-family homes being built.

As in the U.S., the Ontario government looked to stem urban sprawl by enacting stringent land-use regulations that make land for housing scarce. “To accommodate the 38,000 or so net new households it sees every year, the Greater Toronto Area must increasingly expand its housing stock ‘vertically,’” Hogue said.
But of course. this language all rings a bell. It’s reminiscent of the “Manhattanization of Las Vegas.” This is a phrase two Vegas housing experts were so proud of that they publicly fought over who had coined the term.

Similarly, when the housing boom was in full flower, it was said Las Vegas had a land shortage. After all, the federal government owned 90% of the land in Nevada. That’s why everyone had to build up, up, up.

Of course, it turned out that there was no shortage of land, and there was certainly no shortage of air in Sin City. Developers with the blessing of the various municipalities went vertical. During the condo boom, as many as 125 condo projects were proposed. Many of the hotel operators also entered the condo craze.

At a 2005 gaming conference held in Las Vegas, one of the seminars was titled The Future of Gaming — Nongaming. Once the most-expensive land in town was casino dirt. During the condo craze, new resort properties had residential and retail components.

“You cannot [make] a stand-alone casino on Las Vegas Boulevard [work financially],” Vegas real estate expert Richard Lee said at the time. “Unless you add a residential and retail component to it, you cannot afford the dirt on Las Vegas Boulevard.”

In the end, only a fraction of the proposed condos were built. But for those that were, prices have fallen to but a fraction of those proposed in boom time.

“Developers overestimated the number of primary residents that would live in high-rise luxury condos when some 125 projects were planned for Las Vegas,” Hubble Smith reported recently for the Las Vegas Review-Journal. “About one-fourth of those projects were completed, and maybe 30% of the units are owner-occupied.”

“I think we’re very fortunate that those buildings didn’t get built,” says Marc Ehrlich, of, a specialist in large condo sales. “Think of the carnage had those been built.”

Ehrlich told the RJ that buyers are paying as little as $175 a square-foot on short sales and foreclosures, compared with total project costs of $450 a foot. These kinds of economics will keep developers from building high-rise condo projects in Vegas for decades.

But high-rise cranes are everywhere here in Vancouver’s business district. Toronto’s high-rise market is so inflamed that RBC’s Hogue is tying himself in knots rationalizing why the bubble is rational.

First of all, Mr. Hogue says not to worry, because many of the projfects won’t get built. “Possible reasons for such delays or cancellations include production capacity constraints on the part of builders, the inability of projects to reach sales thresholds necessary to move forward with construction and tighter lending standards for builders,” he said.

He goes on to claim that while 15-40% percent of condo buyers are investors, very few are flipping the units. Instead, they are keeping them to rent out. “Their involvement has not inflated overall housing demand beyond household formation and may contribute only to a modest overshoot in the coming years if demographics weaken,” he claims.

However, Ben Myers, vice president of Urbanation, says many investors in the greater Toronto Area are not cash-flow positive renting their high-rise properties. They accept the loss because they think they’ll come out ahead when they eventually sell the condominium. True, investors aren’t flipping now. However, their profits depend upon a greater fool coming along at a later date.

Meanwhile sales have slowed considerably this year, down 51% for the first couple of months. In February, the average price per square foot was $532, compared with $520 a year ago.

Mr. Hogue wants us to believe a soft landing is coming for Toronto’s high-rise market. But all the signs of a bubble are here. When high-rise units fall, they do not fall softly.

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