A new report by the Canada Mortgage and Housing Corporation (CHMC) says the recent downturn in Toronto’s condo market is unlikely to lead to a real estate crash similar to that seen in the 1990s, but acknowledges there are similarities to that time period.
“We do not assess Toronto’s market as being overbuilt as it was during the 1990s. On the contrary, there is currently a structural shortage of housing, which is expected to help clear any inventory build-up as the market recovers,” the CMHC said in a report released on Sept. 24.
The corporation said that while a weaker economy and lower demand are making condominium apartment inventory “harder to manage,” the housing market is currently characterized by a shortage of housing, in contrast to excess demand seen in the 1990s.
At the beginning of that decade, the Bank of Canada hiked interest rates from 11.7 percent to 14.1 percent, and the economy entered a two-year recession. This led to a sharp drop in housing prices, with prices declining by more than 27 percent in the Greater Toronto Area between 1989 and 1996.
The CMHC said Toronto’s condo market is currently seeing declining sales, rising inventories, and project cancellations. However, compared to the 1990s, Canada has a more diverse economy, stricter lending rules that discourage speculative building, and a shortage of housing.
The report states that condominium developers must now sell at least 70 percent of pre-construction units before funding advances, while in the 1980s, that requirement was around 50 percent. Homebuyers also face tighter lending criteria, as they must prove they have a greater financial capacity to service debt and the ability to absorb interest rate fluctuations.
Compared to the 1990s, there is also a more limited supply of housing across Canada. The report says while condominium prices went up due to a limited supply, negative inflation-adjusted interest rates, and more immigration, the slowdown reflects the impact of higher mortgage rates and “adjusted expectations” for lower future immigration levels.
The CMHC says that it anticipates a more “balanced market” in the future. It added that since apartment housing starts in Toronto have “sharply” declined, demand is expected to return within a few quarters. “Combined with current pent-up demand and expected economic growth over the next few years, this could amplify concerns about a lack of housing supply,” the report adds.
Housing affordability has been a prominent issue in Canada for several years, and the federal government has taken on more of a role in the sector compared to the provinces, including by most recently launching Build Canada Homes to build affordable housing on government land.
