Unsold condos risk piling up, Canada’s housing agency warns

The country’s government-backed housing agency is warning condo builders in certain big cities they need to sell more existing units before planning new ones. Specifically, Toronto and Montreal were singled out by the Canada Mortgage and Housing Corp.

“The number of units under construction is elevated in these centres,” the CMHC said. “This could develop into overbuilding if these units are completed but not sold.”

Fears of unsold condos piling up in places like downtown Toronto have ebbed and flowed in recent years as cranes crowd the skyline and even some experts wonder where demand is coming from.

CMHC chief economist Bob Dugan said Monday builders would be wise to ensure more units being built at the moment find buyers before new projects are started.

“Builders will need to hit the appropriate balance in channeling new demand between units that are currently under construction but not sold and units that are in the planning stage,” Dugan said.

It appears many developers already are. Building permits for multi-unit dwellings – i.e. condos – have been falling, and the number of actual starts, or the act of starting construction on a new development, has slumped through the fall in Toronto and elsewhere.

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MORE: Has Toronto’s condo boom ended (with a thud)?

In addition to the comments on potential overbuilding in the condo market, the CMHC provided some thoughts on current home prices.

Home prices stable

At the national level, the housing agency said there is a modest amount of “overvaluation,” however certain “risk factors” like overheating, price acceleration, and overbuilding haven’t been detected.

Canadian housing markets are “broadly consistent with underlying demographic and economic factors such as employment and interest rates.”

Many markets are showing signs of price moderation this year — with three big exceptions. Prices have continued to shoot higher in Vancouver, Toronto and Calgary.

MORE: Are Vancouver, Calgary, Toronto homes headed for ‘sharp correction’?

Some see danger signs in the sustained booms in Canada’s “Big 3” housing markets.

“The regional breakdown continues to reveal some troubling decoupling,” David Madani, an economist at Capital Economics in Toronto, said in a recent note. “In these markets, home prices have lost touch with household incomes.”

The CMHC said Monday market conditions in Vancouver and Calgary remained “low risk,” with prices broadly supported by income levels in those cities. Conditions in Toronto are of “moderate risk.”

“Overvaluation in Toronto is due to steady price growth that has not quite been matched by growth in personal disposable income,” the CMHC report said.

Canada-U.S. price gap

In the housing agency’s annual review released last week, the CMHC noted the strong price differential that’s opened up between Canadian and U.S. home values – a gap of about $100,000 at present.

“This Canadian ‘premium’ could be cause for concern,” the Ottawa-based agency’s report said. “CMHC is analyzing these differences, in order to understand the reasons for the price differential, be they structural, temporary or reflective of relative overvaluation in Canada.”