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’.