A Day of Reckoning Ahead for Real Estate?

“I think the day of reckoning has yet to come. The market is out of whack,” says Frank Clayton, a top Canadian housing economist yesterday.

Canada Mortgage and Housing Corp., Canada’s national housing agency, announced yesterday that the Greater Toronto Area saw the strongest number in housing starts in history during July 2005. Housing starts rocketed 27% from June.

The most shocking part is that condominium starts led the pack. Typically, during any particular period, condo starts represent about 20% to 25% of housing starts. In Toronto in July of this year, however, condominium starts came in at a whopping 57% of the total starts for the month.

The fact is, too, that these starts probably won’t see completion and closings until two to three years from now. The number of condos being built exceeds the number of condos being purchased. For the past three years, an average of 10,000 condos per year have finished construction in the city. This year, 12,000 are expected to be complete. Next year, 17,000 are estimated to wrap-up. Who is going to buy all these condos?

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Even today, well before the projected 29,000 units are up for sale, we have condo vacancies throughout the city. Two or three years from now, who knows whether demand will meet this heavy supply.

Prices for condos in Toronto continue to grow — and more luxury suites are in the works. While current sales in the condo market are rather hot (at 37% of total new housing sales) because low interest rates make condominiums appealing to first-time home-buyers with limited options, once interest rates begin to creep up and condo prices begin to creep down, the outcome can’t possibly be good.

Two years from now, I’m seeing cash-strapped condo-owners stuck with properties valued less then than the principle still outstanding on their current no-money-down mortgages. I also see a lot of investment condo buyers held hostage by thousands of vacant units without a renter in sight.

Michael talks about the housing bubble that’s being created in the United States today all the time. Both he and I have written about how the real estate bubble in the UK is currently bursting, too.

It appears as though Canada’s housing market is about to fall victim to the same fate, with condominium units at the front of the line.

Brace yourselves, because the day of reckoning is coming — and the aftermath won’t be pretty.