Cablegate: Toronto's High-Rise Condominium Market:

P 202026Z NOV 08



E.O. 12958: N/A
SUBJECT: Toronto's High-Rise Condominium Market:
Cooling, But Not Yet a Meltdown

1. (U) Summary: Toronto's market for high-rise
condominiums has begun to cool down in what was
North America's busiest condo construction and
sales market in 2007. The global credit crunch
and slowing economy has created worries for
Toronto developers with projects currently
underway, and even more so for developers with
new project proposals still in need of financing.
Market analysts believe, however, that factors
unique to Toronto such as a steady population
influx, relatively rigid lending practices prior
to the credit crunch, and favorable local
government policies will help developers survive
the economic downturn. End Summary.

Building Frenzy Beginning to Slow Down

2. (U) For the past three years, Toronto has
experienced a condominium building frenzy. In
2005 and 2006 a total of 220 condo projects were
launched, while in 2007 alone the total leaped
to a record-breaking 295 projects. Despite the
slowing real estate market, in the first three
quarters of 2008, another 290 condominium
projects were launched. [Note: These include
condo projects that started sales and/or began
construction.] Of the over 38,000 condominium
units under construction in Ontario during this
same time period, 33,919 were in the Toronto area.

3. (U) The market is now showing signs of a
slowdown, however. The value of building permits
requested in Toronto in September 2008 fell 34%
below that of a year earlier, clearly signaling
a slowdown in new construction planned for 2009.
Moreover, amid global economic uncertainty condo
buyers are more cautious about purchasing at the
pre-construction stage or are putting off real
estate purchases all together.

Downturn May Be Moderate

4. (U) Although both developers and analysts here
agree that the market will see a downturn, they
also believe that it will be moderate. Toronto
does not exhibit the negative indicators present
in the real estate market meltdowns seen in
Vancouver or Miami, Florida. Toronto has only
a 2.5-month inventory, for example, compared to
Miami's 75-month inventory in February 2008.
Toronto pre-construction buyers also have yet
to abandon their deposits. Additionally, while
Canadian cities like Calgary and Vancouver had
overheated housing markets caused by local booms,
housing prices in Toronto did not increase as

5. (U) Because Canadian banks typically require
that a project be 60-70% pre-sold before a
developer can qualify for financing, this leaves
a less of a burden for builders to find buyers
after construction. Toronto's demographic trends
will also continue to drive demand for high rise
housing. Nearly half of Canada's 225,000 annual
immigrants settle in Toronto. Greater Toronto's
population is expected to grow from about 5.5
million to 6.9 million people by 2016. Because
of this, analysts expect that high-rise sales
will continue to account for more than half of
all new home sales, leading to expectations
that the market's drop in Toronto will be less

--------------------------------------------- -
Local Government Policies to Push Construction
--------------------------------------------- -

6. (U) With an estimated population growth of
some 28% over the next 24 years, the Ontario
government has moved to protect some areas
from construction and development. In 2005,
it created an 800,000-hectare "Greenbelt"
area around Lake Ontario to protect the
forests, wetlands, and farmland surrounding
southern Ontario. The result has been a
concentration of development around established
cities, as well as an increase in vertical

7. (U) The Toronto municipal government also
has taken action to encourage development
within the city. In December 2008, the City of
Toronto will review a proposal to freeze the
implementation of development charge increases
for one year, given the current economic climate.
The charges normally levied on developers go
towards services and infrastructure (sewers,
water mains, government facilities, etc.).
City leaders have estimated that 87% of new
infrastructure costs incurred through new
development will be subsidized by the city,
creating a significant incentive for the
developers. For 2008, new infrastructure will
cost some C$308 million.

8. (U) Comment: While high-rise projects
currently under construction appear to be
relatively safe from global economic
uncertainty, future developments remain
vulnerable to financing difficulties.
The credit crisis has Canadian banks more
cautious in their lending, and large
condominium projects tie up more money for
extended periods of time owing to the practice
of maintaining mortgages within the bank.
[Note: According to a new report from RBC
Capital Markets, Royal Bank of Canada and
Bank of Nova Scotia had the largest share
of residential mortgages among the six
largest Canadian banks, based on balance
sheets at the end of the April. RBC had a
26.7% market share and Scotiabank had 22.9%.]

9. (U) Developers may have to turn to
alternative mortgage options such as
mezzanine financing, which blends elements
of debt and equity financing, but tends to
be more expensive than secured-debt financing
(i.e., a mortgage loan). According to a
contact at a market research firm, developers
have already encountered more stringent equity
and presale requirements, as well as higher
costs of borrowing and increased bank fees.
At the same time, some industry analysts point
out that one possible positive outcome of the
economic slowdown may be lower prices for
construction materials caused by the recent
drop in commodity prices. Overall, analysts
foresee a short-term market correction that
will bring prices back to pre-2007 boom levels,
which were still attractive enough for developers
to embark on their building spree. Although,
analysts are reluctant to make long-term
predictions on the condo market, as of yet
there is no perceived sense of panic among
developers and buyers. End Comment.


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