I have received a number of emails from readers recently asking me if this is a good time to buy a pre-construction condo in Toronto.
The pre-construction market is very different from the resale market.
Buying a pre-construction condo is a much more speculative decision.
Buyers are speculating that the pre-construction condo they are buying today will be worth significantly more when it is completed 4-5 years from now. That is the principal reason for buying pre-construction.
This is very different from buying a resale condo. Buyers of resale condos are using the condo either as a principal residence or as an income property and as a result are deriving some utility from the condo beyond just the potential appreciation in value.
Five years ago the pitch for pre-construction condos was a pretty easy one. The resale market was very competitive with prices on the rise and pre-construction condos were selling for less than comparable resale condos.
Today’s market is a bit different. The resale market is now leaning towards a buyer’s market as the number of resale condos on the market for sale has tripled in five years while the demand has remained the same. Furthermore, pre-construction condos are selling for more than comparable resale condos.
As a result, the main arguments most agents make for buying a pre-construction condo have come down to platitudes about Toronto being a world class city where real estate prices will continue to grow indefinitely as a result of our world renowned status.
Some agents have turned their attention to Toronto’s tight rental market as an argument for the benefits of buying a pre-construction condo. This of course is a pretty silly argument as well. Just because Toronto’s rental market is fiercely competitive today, it does not mean that the same will be true five years from now when today’s pre-construction condos are completed.
We are all seeing firsthand how much the condo market can change in five years.
If you want to take advantage of Toronto’s tight rental market, buy a resale condo or a triplex, do not buy a pre-construction condo. Buying a pre-construction condo for rental purposes means you’re making a bet on where the renal market is going to be 5 years from now. Given all the condos coming on the market over the next five years it’s a bit optimistic to assume that the rental market will remain just as competitive.
That aside, the main reason for not buying a pre-construction condo today is that the risks significantly outweigh any potential rewards.
As I mentioned earlier, the principal reason for buying a pre-construction condo is the belief that it is going to be worth more 4-5 years from now when it’s finished.
There are two main factors working against prices increasing.
Firstly, pre-construction condos are priced too high. Many projects are selling for more than what comparable resale condos are selling for which means today’s buyers are overpaying for their investment. If pre-construction condos were selling for less than resale condos, which is the case when the market is behaving rationally, there might be an argument for pre-construction condos. But paying more for a pre-construction condo than a comparable resale condo does not make any sense.
The other argument against prices increasing significantly over the next five years comes down to momentum. Before making this type of investment we have to take a close look at which way the market is heading. While nobody can predict where prices are going to be five years from now we can learn something by looking at where the market is today and gauging the mood and momentum of the market.
The resale condo market today is pretty slow. There are a lot of condos on the market and buyers are taking their time before making an offer. In order for prices to increase over the next five years we are going to have to see the balance between supply and demand shift back to the seller's favour. In order for that to happen we are either going to have to see fewer condos come on the market for sale or we’re going to have to see an increase in the number of buyers.
Given the tens of thousands of condos that are currently under construction I can’t see anything that would result in a decline in the number of condos available for sale. We are more likely to see an increase in the number of condos available for sale over the next four years. If that happens we are going to have to see a proportionate increase in demand in order for the balance between supply and demand to remain where it is today. If the supply of condos increases without a proportionate increase in demand we’ll move further into buyer’s market territory where we’re more likely to see a decline in prices.
I’m not arguing against pre-construction condos because I’m bearish about Toronto’s condo market. I’m actually pretty neutral about the market. There are too many unknowns for anyone to say with any certainty where prices are heading. But while I can’t comment on the degree to which Toronto’s condo market is going to slow down, I can say confidently that the momentum in the market is leaning more towards a slowdown in prices rather than a rally which is why it’s not worth gambling on a pre-construction condo right now.
John Pasalis is the President and Broker-Owner of Realosophy
Realty Inc. Brokerage in Toronto. A leader in real estate analytics and
pro-consumer advice, Realosophy helps clients buy or sell a home the
right way. Email John