What Does the Future Hold for Toronto's Condo Investors? Windfall or Bust?

John in Condo Buying, Toronto Real Estate News

Now that the dust has settled on the insanity that was the 1 Bloor broker preview, we can start asking what the future holds for these condo purchasers.

The new condominium construction market has very different fundamentals from the resale market. New condominium construction sales are heavily influenced by investors who either buy units as rentals, or try to flip or sell them for a profit after the building is completed. A strong increase in activity by speculators is a sure sign that the market is getting over-heated. In the case of Toronto's new condo market, it’s estimated that 60-85% of new condo sales involved investors this year, up from 30-50% last year.

The week long lineup outside 1 Bloor is definitely one sign that things are getting over heated. But you can also 'hear' a lot of the irrationality in the market, if you just listen to what both realtors and investors are saying.  Things like, “you can’t lose”, “it’s the best address in Canada” and “it’s close to Yorkville”, are all meant to justify 1 Bloor’s high sticker price. The silliest argument I continue to hear is one that originally came from Donald Trump a few years ago: “Toronto real estate is undervalued when it is compared to other leading cities in the world. It is only going to increase in value.” The problem, of course, is the word "undervalued."  As compared to what?  The fact is, Toronto isn’t on the River Thames and it’s not an island. Comparing our real estate market to London and New York doesn't make a whole lot of sense.

So what’s going to happen four years from now when 1 Bloor is ready for occupancy? If condo prices continue to rise, investors will have made a handsome profit. If condo prices remain constant, investors will not be able to make any significant profits by selling which means they can hold on to their unit and either rent it or leave it vacant. Alternatively, they can try to sell it to recover some of their investment. How this scenario plays out really depends on the makeup of the investors. In an ideal scenario, the investors have a high net worth and can afford to hold on to their units indefinitely.

If the investors are ‘mom and pop’ investors who can’t afford the mortgage and maintenance fees on their vacant condo, and can’t find renters willing to pay the high rents they would need to finance them, you will probably see a large number of these investors trying to sell their condos to recover some of their investment. If too many owners are selling at the same time, this would invariably have a negative impact on the price of these units. But looking beyond 1 Bloor, what happens if the majority of the investors buying condos in Toronto are ‘mom and pop’ investors? If they can’t find renters when their condos are completed, we might be in for a bit of a ride when they all try to sell at the same time.

To get an idea of what might happen if condo prices drop, let’s look at a scenario currently playing out south of the border. Earlier this month, condo buyers in Miami sued their developer for the return of their deposits. The developer, The Related Group, marketed the condos as investments and verbally guaranteed that condo buyers could make hundreds of thousands of dollars by selling the units, without ever taking ownership. Which would be fine - except that the real estate market in the US has dropped significantly so even if these condo buyers do find someone to sell their unit to, it will be at a significant loss, as  compared to the price they paid. In some cases, the potential losses are so great that buyers are refusing to follow through with the purchase and are willing to walk away from their deposits. Interestingly, these condos were purchased by the investors just a couple of years ago. It’s amazing what can happen in two years.

Any condo investor who still believes that buying a pre-construction condo is a ‘sure thing’, might benefit from calling any one of the many investors in the US who are suddenly ready to walk away from their deposits. The real estate market, just like every other market, is cyclical. Condo developers will continue to build condos, as long as there are people willing to buy them.  But just who these buyers are, whether Home Owners or investors, and how many of them there will be remains a largely unknown variable. Just like every other investment, condos can never be a ‘sure thing’.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

Subscribe to the Move Smartly blog by email 

Comments

[Toronto real estate agents]

Well done, John! You have given us a thorough summary of all the alternatives of investors' future steps.
It could be very discouraging for someone looking for a condo to read about the frequent speculations that surround almost every new development. When people wonder why prices go up, sometimes the answer is only known to investors and properties professionals. There is not much we, Toronto real estate agents can do about it.

[Danny]

If If If ... The fact remains that the market has been moving forward and show no sign or slowing down

[NIck]

Toronto doesn't have a river Thames like London and isn't an island like New York, but what counts is that it is a sprawling metropolis with a vibrant core, international in makeup, and a center of commerce, industry and culture. Consider that gas prices are going through the roof and that immigration to the GTA is strong. You'll realize that more people will want to be close to where they work and play, and spend as little time as possible in their cars as possible. These people will gravitate to the core of Toronto from both the GTA and elsewhere. Toronto Is the NEXT New York or London.

[John Pasalis]

Nick,
I completely agree with you and I also think that increased condo development is going to have a positive impact on our city. The point I was trying to make is that it's silly to compare our market and real estate prices to those in New York, or any other city for that matter.

Prices in New York are high because everyone wants to live on the same densely developed island. Toronto on the other hand is not nearly as dense as Manhattan which means that there is a lot of room for more condos.

This difference in the supply of land is one of the key differences between the two cities and why comparing them is pointless.

I can only hope that Toronto's condo boom is being driven by home buyers who intend to live in their unit, and not investors.

[Andrew Wells]

Great article John.

There is a lot of chatter these days about "the Toronto market reaching its peak", and the "inevitability" of a strong correction.

Could this happen? Sure. But the fundamentals that are driving the Toronto market - population growth, low unemployment, low interest rates, rising energy prices - are likely going to keep the demand strong for inventory in Toronto for the foreseable future.

As you point out, comparing the Toronto Market with New York and London is a bit of a stretch, but when looking at the relative price per square foot that we charge here compared to the rest of the world, we are still a pretty good bargain (Toronto is sitting around $350/PSF, wheras Vancouver is at $900/PSF and Manhattan is over $1500/PSF).

It's also important to look where the investment is comining from. In the last condo boom of the 1980's, most of the investors were indeed of the 'mom and pop' variety'. Today, Toronto is attracting a much more international clientele to it's real estate inventory. The fact that a Hong Kong businessman paid $25million at 1 Bloor speaks to this. The arrival of international luxury brands such as Trump and Ritz Carlton also helps push Toronto futher into the spotlight as a strong and stable place to park your investments.

Buying a condo is like making any kind of investment - the purchaser needs to assess their appetite for risk, determine the profit that they would be looking to gain, and stay in touch with their personal needs and ablities to handle such risk. Real estate continues to be a great long-term investment, particularly because the likelihood of a piece of Real Property being reduced to a value of $0 is far less than more liquid investments.

That said, informed Buyers should be aware that the market is fluid, and buy responsibly.

Personally, I am a big advocate of properties that are unique, and can't be easily replicated. Vintage Lofts such as the Brewery Lofts at 90 Sumach, The Gotham Lofts at 781 King, and The Merchandise Building at 155 Dalhousie all offer great examples of renovation projects that have done well, can't be easily replicated, and will continue to hold their values.

Is the Toronto market due to lose a bit of it's frothiness? Perhaps. But if that means we're looking at yearly appreciations in the 3-6% range, as opposed to 8-10% I think most investors would still find that to be a decent appreciation on their investment.

Keep up the writing - you've got a great blog.

Best Regards,

Andrew Wells
Coldwell Banker Terrequity, Brokerage

[Toronto real estate agent]

Toronto is still a favoured place to move to, and the rising condo prices just underlining this fact. First time buyers are anticipated to be the most active purchaser group next year in Toronto, a recent poll suggested. So I don't think that the zounger generation would be in a very disadvantegous situation right now.