Given all the press about Toronto’s booming condo market, it’s no surprise that one of the most common questions I get from condo buyers is how should they decide which neighbourhood to buy in. More specifically, which neighbourhood is a safe bet and has strong potential for future price appreciation.
While it’s impossible to predict future appreciation in prices, there are a number of things you can do to help ensure you’re buying in a neighbourhood that has a higher likelihood of appreciating when compared to other neighbourhoods in the same city.
Since 2008, Realosophy has been analyzing real estate sales by neighbourhood for our clients and for the Globe and Mail and one thing we’ve learned in that time is that house and condo prices within the same city can appreciate at very different rates across neighbourhoods - the same way markets within Canada like Toronto, Ottawa and Calgary can behave and appreciate at very different rates.
There are two main things we look for when advising our clients who are concerned about future price appreciation. The first is the balance between the supply of condos in the resale market today and the demand for those condos in that neighbourhood. For example, imagine you’re considering buying a condo in two different neighbourhoods and in both neighbourhoods roughly ten condos per month are available for sale. Now suppose in neighbourhood A only one condo actually sells each month and in neighbourhood B five condos sell each month. Clearly the market for condos in neighbourhood B is far more competitive than in neighbourhood A.
One way we like to measure this balance between supply and demand is by looking at the sales-to-inventory ratio (SI ratio). The SI ratio is calculated by taking the number of sales in a given month divided by the number of properties available for sale at the end of the month. In our example above, neighbourhood A would have a SI ratio of 10% (1 sale/ 10 condos available for sale) compared to 50% for neighbourhood B (5 sales/10 condos available for sale).
It makes sense then that condo prices over time will appreciate at a faster rate in neighbourhood B where 50% of available condos are selling every month compared to just 10% in neighbourhood A. This means that neighbourhoods with a high SI ratio are more likely to appreciate at a faster rate when compared to neighbourhoods with a low SI ratio.
To get a better idea of what this looks like in real life, the chart below shows the SI ratio for condos (condo apartments and condo townhouses) in June 2015 for six different neighbourhoods in Toronto. You can see that the SI ratio ranges from a low of 17% in Humber Bay to a high of 57 % in Agincourt. This means that just 17% of the available condos in Humber Bay sold in June compared to 57% in Agincourt.