After some time a boom tends to feed on itself, but momentum can carry it only so far.
Pervasive enthusiasm, especially following an extended period, becomes a bellwether, one that presages dangers for participants.
The building boom in condos is typical, but the timing of the inevitable end is all but impossible.
Following an initial success, a buyer decides to capitalize on that and duplicate his holdings. A double-digit gain whets the appetite of buyers, in cities as in Toronto, Vancouver and even in smaller cities like London or Kitchener. The proliferation of condos is amazing, as are their prices.
In Toronto, for example, prices have soared more than 70 per cent over the past decade. Driving into Toronto on Highway 401, one can see tower after tower of condos dotting the terrain. So many that the view of the harbour is blotted out.
In general, planners have paid scant attention to landscaping. Almost no trees appear between the buildings with no grass whatsoever. Also rumours abound that construction is slipshod and that within a few years, renovation will be necessary.
Young couples are among those who have moved to the city centres after leaving a suburban home.
Now that the peak of family formation has occurred, many want to avoid the upkeep of a house in the suburbs and with children away, there is less need for many rooms or concerns about schools.
Young people with big incomes, wealthy retired individuals, and foreigners seeking a safe place to invest their funds, moved to condos in droves.
The money for construction usually comes from a bank loan, typically accounting to slightly more than half of the construction cost. Before granting a loan, banks usually require that at least 75 per cent of the units are pre-sold.
That entails among other things a deposit of 20 per cent from the buyers. They in turn probably have approached their own lenders for that money. Nowadays the federal government continues to tighten the lending requirements to take away some of the speculative enthusiasm. More restrictive measures are sure to follow.
According to RealNet Canada, sales volumes already have started to taper, and there is a backlog of thousands of units in the market unsold at the present time. Buyers now ignore these early signs of trouble.
Condo buyers appear to be disregarding the risk of ownership. If other owners default, the upkeep, taxes, and maintenance fees must be carried by those remaining.
In the Great Depression of the 1930s that happened often, but it is brushed aside nowadays, even though it could be a long-term threat. Presumably there are sufficient reserves for that contingency, but a major business reversal could upset all calculations, particularly as increases in interest rates are pending and family formation declining. Too, some units being sold have only 600 square feet.
Who will be the buyers eventually? A correction is long overdue.