Fear: Condos are over built in Canada

The most pervasive fear is that developers are overbuilding and this will eventually lead to a glut of empty condos, which will increase supply and push down prices, sparking a condo market crash. But  Marc Pinsonneault, senior economist with the National Bank of Canada, spends his days analyzing condos in Canada’s big cities. He supports the belief that there’s overbuilding in the Canadian condo market—just not in the cities you’d expect.

According to Pinsonneault developers are not overbuilding in Toronto, Vancouver or Calgary—Canada’s three hottest real estate markets and the cities that boast some of the largest condo growth in recent years.  Yet, the numbers show that developers in Montreal, Saskatoon, Regina and Winnipeg are overbuilding and if the market hasn’t already cooled it will, says Pinsonneault.

The fact is that despite an increase in building permit applications and an increase in completed, new condo units entering the market, supply really is keeping up with demand in Toronto, Calgary (although a little less so in Vancouver).

“In Canada as a whole, the number of completed and unabsorbed condo units amounts to only two months [worth of supply], versus the more than four months [of unabsorbed condos that existed] in the 1990s,” explains Pinsonneault.

Fear: Foreign investors prop up the condo market in Canada

The fear is that foreign ownership is propping up the condo market, particularly in Toronto, Calgary and Vancouver. And there’s basis for that fear. But like all things real estate, it really does boil down to location, location, location.

Late last year, the Canada Mortgage and Housing Corporation released it’s first ever report that attempted to shed some light on who actually own’s condos in Canada. Wildly publicized when it was released, the report highlighted the apparently low percentage of condos owned by foreign investors (defined by the CMHC as condo-purchasers whose primary residence is not in the city where the condo-investment is located). As such, the CMHC reported that only 2.4% of condos in the Greater Toronto Area and only 2.3% of Greater Vancouver’s condos are owned by foreign investors, respectively. Edmonton, Regina and Winnipeg had the fewest number of foreign condo owners, at 0.1%, while Calgary’s foreign ownership of condos was just over 0.2%.

But drill down and the CMHC numbers start to reveal an alarming trend: a concentration of foreign-owned condos in a city’s downtown core. For instance, 5.8% of condos in downtown Vancouver are foreign owned. In Toronto’s downtown core 4.3% of condos are foreign-owned. Surprisingly, the CMHC did not drill down Calgary’s condo ownership, however, it did unearth a big concern when it comes to Montreal’s downtown condos. According to the recent CMHC report 6.9% of the condos in Montreal’s downtown core and Nun Island area are foreign owned—compared to the city’s 2.3% average.

Foreign ownership is a key concern as real estate analysts fear that if the market turns, foreign owners will be more likely to put their units up for sale and this can flood the market, push overall condo prices down, and start a market crash.

Montreal aside, most analysts are now far less concerned about the percentage of condos owned by foreign investors. CIBC World Market’s deputy-chief economist, Benjamin Tal, estimates that the number of “pure foreign investment” condos in actually a small segment of the market—and only slightly higher if you factor in families where one spouse continues to live overseas while the other lives with children who attend school in Canada.

Still, that doesn’t mean that the number of condos owned for investment purposes isn’t surprisingly high in Canada. According to a CMHC report, released in mid-2014, just over 17% of condo owners own a secondary condo-unit as an investment. (For statistical accurateness the CMHC combined the findings for Toronto and Vancouver.) This number doesn’t include the number of investors who rent out their condo and live in another type of accommodation (either a single-family home or a rental apartment) nor does it include investors who use corporations to purchase property.

An accident by a contractor caused damage across four units

Courtesy of The Vancouver Sun Newspaper

Carmen Cheung thought her condo renovations were almost done – then a contractor punctured a pipe, sending an hour-long cascade of water through the walls of her Burnaby home.

"I saw … like rain coming down from outside, it was pouring like a waterfall," Cheung told CBC News.

The damage was so extensive that Cheung — and the occupants of three other condos in the building - had to relocate during the repairs. A disaster turned into a nightmare, as Cheung found herself in a snarl of seven insurance companies.

"I feel so frustrated, and at the same time I feel very sorry for the other units, because they have to pay the expenses too," she said.

Cheung says that the strata's insurance corporation insists that her mother — as the legal owner of the condo — is responsible.

"My mom didn’t drill a hole. My mom didn’t cause the flood. So we went to our insurance company, and basically they said it's not their responsibility."

"It’s really, like no one is telling me anything."

The insurance companies stalled over who should cover what.

The property manager for the strata corporation began demanding deductibles and leaving phone messages, suggesting Cheung is responsible to pay or the matter may end up in court.

A renovation accident caused a massive flood in Carmen Cheung's condo, forcing her and the residents of three other units in the building to move out while repairs were made. (CBC)

Cheung says she scrambled to understand her rights. Her elderly mother, the legal owner, felt blamed and tried to make amends with neighbours by apologizing, and even paying $189 for damages done to another unit.

"You know what? No insurance claim should be that difficult," says Kevin McIntyre, president of the B.C. Insurance Broker’s Association.

"But when you have a situation like this, when you have three different adjusters involved in one probably relatively small loss, and a whole bunch of insurance companies and a property manager involved and a strata council involved — it's just too much. It's just too confusing - and frankly it shouldn't happen."

McIntyre says a lot of times an insurance broker can act as an advocate for the individual condo owner.

Many condo owners are also under-insured. More than half of B.C.'s condo holders do not have homeowners' insurance, according to McIntyre.

Carmen Cheung's apartment before she began renovations. (CBC)

That is a risky situation, says Tony Gioventu, of theCondo Homeowners' Association, because if an owner is responsible, they are likely responsible for paying a deductible that could be anything from $500 to $100,000.

Water damage and floods are the highest causes of loss to Canadian insurance in recent years — flooding alone costing $3.4 billion to the industry.

That’s driven premiums up — and put a lot of pressure on condo stratas not to make claims — according to Gioventu.

He says he's seen bullying from all sides in disputes, from condo board members, property managers.and from neighbours.

"People putting a lot of pressure on their neighbour because they say, 'Hey wait, just because you had a claim doesn't mean I want our insurance to go up.'"

The worst part about situations like Cheung’s, McIntyre says, is not the soggy walls — it’s the bad blood between neighbours.

"The saddest thing for me is, it's neighbour against neighbour, in a place that you want to go home and enjoy your life and relax in."

Numerous calls to the property manager received no response. Attempts to reach condo board members were unsuccessful so far.