Millennials spurring Canadian condo boom bet on rates

TORONTO — Qamar Qureshi is doubling down on Toronto's condo boom.

Qureshi, a senior finance manager at Sun Life Financial Inc., took out a mortgage this year for a C$360,000 ($323,000) one-bedroom unit plus den in downtown Toronto to live closer to work. Three years ago, he bought a C$320,000 luxury suite before construction started and will begin making payments when it's finished next year.

“It was worth it because interest rates didn't seem too bad — you have to strike while the iron is hot, right?” Qureshi, 29, said from his car en route to his 12th-floor apartment overlooking Lake Ontario. “They won't raise interest rates any time soon. I know it. People have been saying rates will rise for years and it hasn't happened.”

Qureshi is among the younger Canadians who, lured by record-low borrowing costs, are fueling a surge in Toronto condo sales. As the nation's household debt nears an all-time high, these buyers may face a spike in mortgage payments and the possibility of default once rates begin to climb.

“The younger millennials don't have any recollection of any interest rate rise or shock and what impact that would have on their day-to-day finances,” said Jason Daly, vice president of product and marketing at Waterloo, Ontario-based Manulife Bank, where residential mortgage loans make up about 80 percent of its C$23 billion in assets. Many millennials, born from 1980 to 2000, don't realize that when rates jump their debt servicing costs will go up significantly, he said.

Condo sales in Toronto, Canada's largest city, jumped 20 percent to about 2,000 transactions in September from the year- earlier period. That compares with 6.5 percent the month before and 14 percent in July.

Developers, whose cranes crowd the Toronto skyline, have about 130 condo towers under construction. That's the most in any North American city, according to industry researcher Emporis GmbH.

First-time homebuyers are the most active purchasers of condos, according to Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce in Toronto. They have been lured to the towers after mortgage restrictions in the last five years priced many first-time buyers out of the low-rise market. Today, half of those in Canada aged 25 to 35 are homeowners, according to data compiled by CIBC.

The “robust” condo sales activity “is driven largely by investors and first-time homebuyers who see condo ownership as a cheaper alternative to unaffordable low-rise units,” Tal said in a Sept. 17 note to clients.

Sales of existing homes in Canada grew in August at the fastest pace in four years, led by Toronto and Vancouver. The 1.8 percent rise to 42,295 units was the seventh monthly national increase in a row, according to the Canadian Real Estate Association.

Vancouver sales rose 8 percent to 2,967 units in August and Toronto purchases climbed 2.1 percent to 8,259. The trade group boosted its 2014 sales forecast to 475,000 units from a June prediction of 463,400, citing a burst of activity fueled by a drop in mortgage rates after a “bleak” winter.

Condo owner Paul McGuire, 29, said the renewed strength in prices has made many of his friends anxious about missing the chance to buy a home.

“Some of them have been saying, ‘I need to get in because prices are only going up,' “ said McGuire, a treasury manager at a manufacturing company.

He owns a condo in downtown Toronto and lives in another two-story loft in the city's west end that he bought last year. McGuire cautions friends against overbidding for units.

“You don't want to be house-poor,” he said.

Borrowers have been attracted by mortgage rates that dropped to an average 4.8 percent for a conventional five-year term in April — an all-time low — and have stayed in that position since then, according to Bank of Canada weekly data. That compares with 6.3 percent a decade ago and a record peak of 22 percent in 1981. Lenders are charging customers as little as 1.99 percent for some mortgage products.

Household debt rose to 163.6 percent of disposable income in the second quarter, approaching the record 164.1 percent last year, according to Statistics Canada. The rise has been fueled by a 1.4 percent rise in mortgage debt to C$1.17 trillion.

Buyers today are less concerned about a possible housing bust since the Bank of Canada toned down its statements about possible issues, according to Toronto-based Douglas Porter, chief economist at Bank of Montreal.

“Some of this year's surprising strength and resiliency in housing is due to the fact that we are hearing much fewer warnings out of Ottawa this year,” Porter said by email.

Finance Minister Joe Oliver told reporters on Oct. 1 he didn't see “a housing bubble, neither does the governor of the Bank of Canada,” referring to Stephen Poloz. Poloz has said the housing market is Canada's main domestic risk.

Former Governor Mark Carney and the late Jim Flaherty, by contrast, spent a good part of their tenure issuing warnings about rising household debt. Manulife Financial Corp.'s Canadian bank in 2013 withdrew a promotional 2.89 percent five-year fixed rate under pressure from Flaherty, who said he didn't want a “race to the bottom” on mortgage rates.

The Bank of Canada's overnight interest rate is forecast to rise to 1.5 percent by the end of next year from 1 percent now, where it has stood for four years, according to a Bloomberg survey of economists.

The 26 percent of Canadian mortgage holders with adjustable rates will be impacted immediately by an increase in interest rates. The 66 percent with fixed rates may feel the pinch when they refinance.

When interest rates rise, “even though it's going to be a gradual pace, it's still going to be a hefty burden,” said Mazen Issa, senior Canada macro strategist at TD Securities in Toronto.

Debt payments would eat up 52 percent of income for people holding mortgages insured by the government if loan rates rise by 2 percentage points. That compares with 45 percent in the first quarter, according to calculations by DBRS Ltd.

The job market may not rescue younger Canadians having trouble paying their mortgages. Statistics Canada's latest labor market report showed a surprise loss of 11,000 jobs in August, led by a record 111,800 in employees shed at private companies. The Bank of Canada in July said that the slack labor market has been tougher on young workers, leading to a bigger drop in their labor force participation rate.

Average home prices were about five times greater than incomes in the second quarter, a record high and up from about three times income a decade ago, according to the Bank of Canada.

If Qureshi's mortgage payment increased by about 30 percent a month, he may not be able to afford his recently purchased 800-square-foot (74-square-meter) unit in Toronto's City Place complex. Qureshi, who tracks his expenses in an Excel spreadsheet, now pays C$2,100 monthly and said he can afford up to C$2,800. That's not taking into account the payments he'll need to start making on his second unit next year.

Qureshi isn't shaken about the possibility of higher rates.

“I've always been a positive person,” he said. “If I can't afford paying off the mortgage, then hopefully my income will go up.”