Photo: Carlos Pacheco/Flickr
The rising number of unsold condo units in the GTA isn’t what it seems, at least not if you’re one of those who believes growing inventory is a sign of an impending bubble burst.
In commentary published Monday, Canadian Imperial Bank of Commerce economist Benjamin Tal writes “those who look at the rise in unabsorbed units as a sign of increased vulnerability are barking up the wrong tree.”
Sure, Tal notes that an increase in the number of recently completed and as-yet-unsold units typically signals potential trouble ahead for developers. It suggests developers are having a tough go of offloading their merchandise, after all.
Tal also accepts that the number of these lingering unsold units has indeed grown this year. However, he points out an important factor to consider: “Registering a completion is more art than science, as different data providers use different criteria,” said Tal.
While the work of number-crunchers likely won’t be hanging in the AGO anytime soon, there is still a creative element to their activities. Tal points to the Canada Mortgage and Housing Corporation statistics tracking unabsorbed units between December 2014 and this past May as an example.
“The number of unabsorbed units rose from less than 1,000 to close to 3,000,” he writes, noting that exceeds even what was observed during the early-’90s. Then, he highlights a sudden 800-unit monthly drop in June for the number of these unabsorbed abodes, adding, “In absence of an economic shock this kind of volatility is suspicious at best.”
The root of this dates back to 2012, suggests Tal. That year, just under 50,000 homes were started, including nearly 30,000 condos. “When you start, you usually complete,” he said, and that’s where the “art” comes in. CMHC recorded 10,000 completions in January, a “highly abnormal” number, said Tal, and 26,000 in the first half of this year. “CMHC was undercounting in late-2014 and overcounting in early 2015,” Tal tells BuzzBuzzHome News. “That’s why you saw this volatility.”
“I don’t think there is any conspiracy, it’s just a matter of accounting,” he added.
Tal noted that RealNet, a GTA market researcher, spread these completions out for the second half of 2014 to the first half of 2015 in its own analysis. This resulted in 2,000 unabsorbed units being recorded by June. “Clearly higher than it was a year ago, but without the drama,” said Tal in the commentary.
Meanwhile, the number of unabsorbed GTA units isn’t indicative of a widespread trend, the CIBC report goes on to suggest. Rather, a third of all these units are from projects that four developers started, and a quarter of them are from five developments. For context, 77 projects had unabsorbed units in the GTA.
And in some of these cases, it is a matter of developers simply not needing financing from the banks. Tal tells BuzzBuzzHome News that banks typically require 85 per cent pre-sales before they offer financing, but a number of these developers are simply well heeled enough to not need anyone else’s cash. They are building first, marketing later. “If you don’t need the banks… you can do whatever you want,” says Tal.
All of this doesn’t mean the condo market isn’t going to face challenges looking ahead. Echoing a CMHC report released yesterday, Tal cited rising interest rates as something to watch for. That, and a heating up of resale activity causing “excess supply and some downward pressure on prices.”
However, based on Tal’s analysis, the sky isn’t exactly falling at the moment.