Editor's Note: In our "Five Questions" series, Move Smartly bloggers get answers to the questions we'd all like to ask about Toronto real estate news.
John Daly has written an engaging piece on Toronto's seemingly insatiable appetite for condos in this month's Report on Business Magazine. You can find the current ROB magazine on newsstands or read the article online (read here).
I invited John to answer five questions about his article and Toronto's condo scene in general:
Urmi Desai: There is increasing concern that new condos no longer make for good investments as the average price per square foot for pre-construction condos is approaching or even exceeding that of comparable resale condos. Have you seen any sign of “condo love” slowing down in Toronto?
John Daly: Condo love still appears to be very strong. There are a lot of great big holes in the ground and construction cranes going up downtown. Just near The Globe and Mail, Trump’s tower is near its full height, Shangri-La is rising, and several towers are underway in the massive Concord CityPlace project. And the names are getting even more imaginative. Shangri-La calls its apartments “private estates.” At CityPlace, you can buy into buildings called Quartz, Panorama and Parade.
Of course, all that hype and construction could be proof we’re late in a cycle – it takes a few years between the start of sales of a project and actual construction. Still, the only proposed downtown project I’ve seen fold badly in recent years was something called Korman House, at Queen and Sherbourne, which is a rough intersection with several missions nearby.
Urmi Desai: Do you agree with Brad Lamb’s prediction that the condo market will level off when the average price per square foot reaches $750?
John Daly: I agree with Brad Lamb that there’s probably a threshold, but putting an exact number on it is hard. There are all kinds of rules of thumb. Brad’s $750-a-square-foot number was based on per-square-foot prices and what it might cost to carry a mortgage at current interest rates. He’s a smart guy, and his logic seems sound.
I still remember traditional homebuying rules like not paying a price higher than three or four times your average income. With average household income in Canada somewhere just over $80,000, I can’t see how people can afford to spend $400,000 – or even more – on any kind of home. Yet they’re still doing it.
I’m guessing that even a slight interest rate increase might have more of an impact than a lot of real estate agents think.
Urmi Desai: Real estate agents and condo developers often talk about how affordable Toronto condos are relative to London, Hong Kong and New York. Is it reasonable to compare markets in two different cities?
John Daly: I think it’s reasonable to compare condo prices in different cities, but I don’t think Toronto is in the same league as London, Hong Kong and New York. I live here, and it just ain’t a World Class City.
I think there are probably broader ranges of international investors buying in those cities. And the supply of property in desirable neighbourhoods is much more physically limited – Toronto isn’t an island, and it doesn’t have the same restrictions on building in the old parts of the city that London has.
Urmi Desai: You mention that 25% to 40% of new condos are being bought by overseas buyers. Which countries are the biggest buyers?
John Daly: The phenomenon of overseas buyers is hard to pin down because I haven’t seen any hard, definitive numbers. It’s almost entirely anecdotal evidence. You hear a lot about Chinese buyers now just as you did in the 1980s, when Hong Kong’s future still looked uncertain. Even if that talk is true, I think demand from overseas buyers is different in different neighbourhoods in and around Toronto.
Urmi Desai: Earlier this month the Globe and Mail reported a recent study that showed real estate investment trusts (REITs) are more profitable than condos. Would this argument be persuasive to those buying condos as investments?
John Daly: In the same issue of ROB magazine in which my story appears, Fabrice Taylor, our investment columnist, raises some red flags about residential REITs (read here). He says a lot of them have paid out more in distributions to investors in recent years than they’ve generated in free cash flow. Remember that many REITs are geared to income investors, and a lot of those investors are elderly. You have to look carefully at the financial statements.
On the other hand, an actual condo or house or piece of property is an illiquid investment. You can’t just sell off $10,000-worth if you need cash, as you could with REIT units or any other security.
Urmi Desai is editor of the Move Smartly blog and is responsible for Realosophy’s business strategy and marketing. Realosophy Realty Inc. Brokerage focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions. Email Urmi