Each panelist at a recent Toronto real estate conference had a reason why the city's condo market is not a bubble. But the developers, the lender, the receiver, the marketer and the real estate agent each talked about the things that worry them.
Everyone is uncertain about what is going to happen in the condo market in the next few years, said Steve Gagro, a senior manager at Laurentian Bank of Canada who specializes in lending to real estate developers.
With 325 condominium projects on the market and another 173 towers under construction, Toronto's skyline is spiking with condo units and cranes, with more new buildings underway than in any other city in North America.
The building boom and 15 years of rising prices have stirred worries about a real estate bubble in Canada's largest city, where historically low interest rates have encouraged buyers to take on more household debt than ever.
Industry stakeholders stress that the potential for a crash is slight, and most of the talk at the Queen's University seminar was about the strengths of the market.
But as construction cranes swiveled outside the windows, the discussion repeatedly circled round to the danger signals that have become impossible to ignore, similar to pilots explaining why they are packing parachutes to take onboard. The developers talked about tighter financing and affordability. The real estate agent wondered about a growing gap between new condos and the resale market. The bankruptcy specialist worried about high supply and few players. The salesman talked about skittish investors and bad press.
While it sounds like Canada may be importing the 2008 housing bubble from its neighbors to the south, nearly everyone in the industry argues that Canada is different.
It did not suffer the financial crisis the rest of the world did in 2009, mortgage interest is not tax deductible as in the United States, mortgages are not repackaged and resold among lenders, and there is very little subprime market.
The market, too, is different.
Demographics does an awful lot to support this condo market, said Jim Ritchie, head of sales and marketing at Tridel Corp, one of Toronto's largest condo developers.
Toronto, with an area population of 5.8 million, accepts about 100,000 new immigrants every year. The bulk of them are from countries where dense urban living is common, and a hard-to-determine number of foreign buyers are helping to prop up the market.
Efforts to encircle the city with a green belt of undeveloped land has limited some of the sprawl, creating a virtual island that mimics pricey real estate centers like Manhattan, Hong Kong and Singapore.
Mortgage rates that start at 2.4 percent and don't rise beyond 6.75 percent have boosted affordability, especially compared with pricier single-family homes. The average condo price is C$368,000 (US$378,000) less than half the C$821,000 (US$844,000) it costs to buy a house.
But even developers who say there is no bubble speculate publicly about what will happen when the boom starts to cool, and everyone appears braced for bad.
Condominium development is good, it's part of our business, said Ben Rogowski, executive vice president of developer Canderel Group. If a year from now it is not good, we have lots of other skill sets and we will focus on a different part of the business until we feel that it is there again.
Canderel is focused on inner Toronto and has no plans to change.
I think we will continue to focus on downtown, because when things do change, they probably will fall from the outside in. In our opinion ... the margins will still be ... downtown, Rogowski said.
LENDERS ON A LEASH
There is little question that concern about the Canadian housing market is making its way from the corridors of power in Ottawa to the big banks, which hold the purse strings for both developers and home buyers.
I believe the uncertainty (about the condo market) is increasing potential risk associated with lending, said Laurentian Bank's Gagro.
A banker who specializes in lending money to real estate developers, Gagro said Canada's banking regulator, the Office of the Superintendent of Financial Services, has been making the rounds of Canada's big banks to make sure they are not making bad loans that will bring the industry closer to a bust.
Over the last little while OSFI has come in and shaken the chain a little bit with respect to condo exposures, so everyone is a little more cognizant of who they are dealing with and how they are structuring the deals, said Gagno. He noted that developers must typically sell at least 80 percent of units in a project before construction can begin.
Banks are going to be selective about who they are dealing with ... how deep their pockets are, their ability to respond to financial obligations, a demonstrated track record and being able to bring projects to market, he said.
The tighter financing reassures Ray Drost, senior vice president and partner at Ernst & Young Real Estate Services, the team called in when bankruptcy threatens a developer or a project and restructuring must be done.
Our restructuring practice is probably the largest in Canada and I can tell you we've been called on one project in the last 36 months - one, he said.
Drost says a huge pipeline of supply is one concern, but believes the big players will weather a cooling in the market.
I think it will slow down but I don't know if we're going to see a lot of failures, frankly, he said, noting he has lived through several corrections and knows the signs.
I think probably the ones you will see or hear about are smaller developers who haven't managed their marketing well, that have maybe cut corners where they shouldn't have, and have not really matched up the project to the target market.
A final concern is whether projects are being rushed to market before interest rates rise or consumer confidence retreats. New starts of urban Canadian condo projects dropped 21 percent in May, nearly reversing a 27 percent increase the previous month, and remain well above historical averages, the Canada Mortgage and Housing Corp said on Fr ida y.
But the threat of higher interest rates has been raised so often and for so long that no one is sure how much attention to pay to the risk of slightly higher borrowing costs in 2013 or 2014.
Tridel's Ritchie sees mixed signs, with investors looking to flip condos or rent them out more worried than younger buyers who cannot believe Toronto real estate will ever be a losing bet.
We have a lot of people in our buyer profile who have never experienced anything but an up market - so they keep coming back to the trough, so to speak, Ritchie said. But it doesn't always work that way.