Article
December 01, 2007
Perks Fuel Interest
Low maintenance and price swaying buyers to condos
In March, TD Bank Financial Group conducted a survey of Canadians potential condo buyers, aged 18 and over. The findings confirmed condos are viewed as an increasingly attractive option for many Canadians and the sentiments expressed suggest that demand for new and resale condos will remain strong. Thirty-nine per cent of those surveyed said they were likely to consider buying a condominium as a principal residence up by four per cent from a similar survey done in June 2006. The top two reasons for preferring condos—lower maintenance costs and greater affordability.
The top three amenities were good building security, attractive design and environmentally—friendly/energy efficienct features. The last item is of particular interest reflecting an increased environmental awareness, which is consistent with the fact that concerns about the environment are ranking at the top of many public opinion polls. Alternatively, it could describe a desire to keep monthly expenses on utilities as low as possible. Proximity to public transit, retail outlets and entertainment were also deemed to be attractive to potential buyers.
Condos have delivered a strong performance
The attractiveness of condos is evident in the recent strong activity recorded in the major markets across Canada. From 2001 to 2005, condo starts have posted an average annual increase of more than 16 per cent. And, condos have climbed from close to one-fifth of all new home construction to almost one-third over the past ten years. Despite the strong supply coming on the market, robust demand has quickly absorbed the additional units. Indeed, with the exception of Montreal, conditions have been consistent with characteristics of a sellers’ market. Consequently, the demand-supply balance has supported solid or strong price gains especially seen out west posting double digit condo resale price increases over the past few years.
Looking ahead, there is every reason to expect that the level of activity will remain strong and that prices will continue to advance, but some cooling will likely be evident in regions where affordability is being eroded by price growth.
Low unemployment and stable interest rates are supportive
The key short-term drivers for housing demand are labour market conditions and the level of interest rates. On these two fronts, the outlook is favourable. We’ve run out of superlatives to describe the Canadian labour market performance. There were 63,000 net new jobs created in October, driving the national unemployment rate down to yet another 33-year low of 5.8 per cent.
The interest rate outlook suggests that mortgage borrowing costs will remain stable and low by historical standards. With respect to the long-term projection on fixed mort-gage rates, the five-year fixed term rate is benchmarked against the five-year govern-ment bonds quite closely. The outlook on the variability around the current yields is for stability with a possible increase of 50 or a half-percentage point basis points over the next 18 months, which is the similar outlook for the mortgage rates.
Condo affordability remains superior
One should also stress that while the erosion in affordability in some major markets will act as a constraint, condos are significantly more affordable than alternative real estate options. To illustrate, they are a roughly one-third less than the average price in Calgary and Toronto. Obviously, one must factor in the financial burden of condo fees when mak-ing comparisons, but the fees often cover items that homeowners would have to pay themselves in non-condo dwellings. So, while affordability may temper market performance, the drag should prove less of an obstacle for condos and their target market.
The bottom line is given the current state of affairs with an all time low unemployment rate, a stable short and long-term interest rate environment and affordability, the survey appears to correspond well the positive economic trends. Condos are an attractive alternative to buying a detached dwelling and affordability is often far greater. Some cooling is expected in Canada’s major condo markets, but conditions should remain healthy and the level of activity will be high. So, the risks do not outweigh the short-term and long-term drivers for condos that all look to remain supportive.
For a full read of this article please visit http://www.td.com/economics
Source/Author: Craig Alexander, VP & Deputy Chief Economist CL
Brent Peters is a Mortgage Consultant with TD Canada Trust. As an economics graduate, Brent started his banking career in 1994 holding titles from Securities Trader to Area Mortgage Manager. To contact Brent, please email .(JavaScript must be enabled to view this email address)