Lessons from the U.S. real estate crash: Condos in Toronto and Vancouver

The reason why so many Canadian’s are trying to invest in U.S. real estate is a combination of a strong Canadian economy (and strong Canadian dollar as a result) and the U.S real estate crisis of 2008. More mortgage lending occurred before the crisis than any other point in history, and home sales reached a peak. We all know how that story ended; U.S. credit was in shambles and banks started enacting foreclosures by the handful. While that has created lots of opportunity for investors, it wasn’t a happy outcome. With more housing and condo developments in progress than any city in North America, could the same thing happen in Toronto or Vancouver?
Harbour Square

The state of Vancouver and Toronto’s markets

In Toronto, there are reportedly 325 condo projects on the market and 173 towers under construction. Just as it was before the U.S. real estate crash, interest rates are historically low, which has “encouraged buyers to take on more household debt than ever.” Not to mention the real estate market has seemed to be in a constant state of growth for a while now, which can’t continue forever. Even with all the negative factors and the parallels to the U.S., it’s very unlikely a similar crisis will occur here. The city and surrounding metropolitan area has a population of 5.8 million people, with 100 000 new immigrants coming in every year.

“I think it will slow down but I don’t know if we’re going to see a lot of failures, frankly,” says Ray Drost, senior vice president and partner at Ernst & Young Real Estate Services. “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.”

Looking towards the future

A TD report is equally optimistic about Vancouver and Toronto’s real estate future, which says that while condo developments are at the highest risk of failure in both cities, the demand meets the supply for the foreseeable future.

“For now, the rental markets in Toronto and Vancouver are both quite strong with low vacancy rates, helping to mitigate the risks in the near term. Farther out it depends on the underlying strength of the economy and migration into each city,” says the report.
Vancouver West Coast Glow

Should we be worried?

The current growth of the condo market is not sustainable and it will have to slow down soon to avoid a crash or failure. The Bank of Canada and Finance Minister Jim Flaherty “recently stepped up warnings to Canadians to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.”

We agree the condo market in Vancouver and Toronto will not be able to continue on its upwards trend and interest rates will start rising soon enough. But it’s our belief that most of the fears surrounding a condo crash like the 2008 U.S. real estate crash are just our Canadianism talking. Consideration to the possibility of a crash like the U.S. real estate crash of 2008 isn’t completely out of the realm of logic, but don’t start yelling that you smell smoke just yet.

To learn more about investing in U.S. real estate, sign up for our free mailing list.

Interested in U.S. Real Estate? Sign up for our VIP Mailing List.