Condo investors cast shadow over housing market

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Threat to market stability debated

By Mark Brownlee.

Cranes and construction crews have been a constant presence along Ottawa’s skyline in recent years as parking lots and vacant properties are transformed into highrise condominiums.

Builders continue to break ground and file fresh development proposals with city hall, betting that demand for urban living will trump any slowdown in the broader real estate market.

But some are keeping a close eye on the potential risks associated with a rising number of real estate investors, who are estimated by some to be snapping up roughly one out of every five new condos.

“Investors are buying units that they don’t intend to live in,” says Matthew Sachs, general manager at Urbandale Construction, which is currently preparing a highrise project at 99 Parkdale Ave. He calls the sizable volume of investors “a risky thing for the housing market.”

What concerns Mr. Sachs is the prospect of a sudden drop in home prices and the possibility of large numbers of investors calculating that they would lose less money if they simply forfeited their deposits.

“If there’s a downturn and they don’t feel they can rent it, you might see investors walking from their deals,” says Mr. Sachs. “On a big scale, that could be disastrous for the condominium market because it’s so investor-heavy and speculation-driven.”

Observers say the 2008 financial crisis and subsequent market volatility spooked investors, prompting some to move money out of equities and into real estate. Attractive borrowing rates, a stagnant supply of competing purpose-built rental units and other factors have all contributed to the rising number of condo investors.

The percentage of condominiums owned primarily for the purposes of being rented out in Ottawa has steadily increased during the past few years, according to the Canada Mortgage and Housing Corp.

In 2006, 3,340 of the 19,483 total condominiums in Ottawa – roughly 17 per cent – were being rented out. By last year, that had increased to 5,426 of the 26,216 condos in the city, or one in five.

While CMHC’s figures don’t take into account new units under construction, officials at the Crown corporation nevertheless say would-be purchasers are unlikely to walk away from their investments.

For starters, Ottawa home prices are not expected to collapse, says Sandra Pérez-Torres, a market analyst for Ottawa with CMHC.

Furthermore, she argues that investors are unlikely to abandon their deposits.

“There’s a significant amount of money that they would lose if they just walked away,” she says.

Other developers share her sentiment. Ashcroft Homes president David Choo says he’s not worried because real estate investments continue to appreciate in value and don’t have the same risk of losing all their worth the way stocks do.

But Urbandale’s Mr. Sachs doesn’t think the deposit is enough to keep an investor tied to a unit in the event of a downturn.

He cited the example of one investor who placed down payments on 12 of Urbandale’s condominium units, but ended up walking away from the eight for which he couldn’t secure mortgages.

His firm is attempting to mitigate this risk by designing units in its current project at 99 Parkdale Ave. with lots of storage space and high-end appliances, Mr. Sachs says.

Mr. Sachs notes this enables the company to target people who will be buying the condo units to use as their primary residence and who will stay tied to the unit.