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Will the Condo Market Crash?

It’s that time of year again, the time of year after a very busy spring market (I would argue a typical spring market) that was full of bidding wars, new price records being set, sellers making enormous profits, buyers extending themselves to the max, and the pundits were left scratching their heads saying: is this a bubble? Is the condo market about to crash? Cue the headlines proclaiming that prices will soon fall. It seems every year around mid-July when all the final stats are in for the busiest time of year for real estate (April, May, June), the mass media looks to tell us that this is not sustainable and that it is all about to fall apart.

The Globe and Mail and the Toronto Star are competing for your eyeballs right now running the same story: some of the good folks at TD bank are claiming that sometime in the next 2 years the market will slow down and prices will fall. Wow, what a bold prediction (sarcasm)!

Here are my problems with this prediction (and others like it):

1. They are extremely vague. Interest rates will go up and incomes will go down, therefore prices in Toronto and Vancouver will fall 10%. Really? How will this happen? Why will this happen? Show me some statistics in the market right now that leads you to believe this is going to happen. These articles are always very short on specifics.
2. They are too broad in scope. Economists and bankers are trained to think of the big picture. We live in a global village, however, real estate is still local. If you want to know what will happen to the downtown Toronto condo market – talk to the experts who live and breathe the market, not some economist who has never set foot inside a Toronto condo.
3. They are too long term. Trying to predict the real estate market beyond about 6 months is a fool’s game. Look at any of the predictions made 2 years ago for where the market would be today and you’ll see what I mean.
4. They are media driven. Bad news sells. Good news doesn’t. This is a simple concept we all understand. If a pundit comes out and says that everything seems fine and will continue along as it has been, that pundit will soon be out of work!

I only see two things causing a change in the Toronto condo market in the short term:

1. RAPID rise in interest rates. If interest rates rise, this won’t likely impact the market – because they will rise slowly and the market will adjust accordingly. If they rise quickly and significantly, then we will see a big impact. (Consult further: Toronto condo market in 1989.)
2. MAJOR economic catastrophe. If Greece defaults, or the U.S. doesn’t get their act together and they are downgraded, the world will feel the pain and the trickle down effect will most likely and eventually hurt the Toronto condo market.

Thoughts or questions? I always like to hear from my readers. Leave a comment or contact me directly.

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Condo Sales and Prices Up in June

June’s sales figures were just released and wow, what a difference from the last two months! When comparing June 2011 with June 2010, sales are up BIG downtown and prices are up too. Remember that June 2010 was the last month before the HST kicked in, and many buyers and sellers were still scrambling to get in under the wire of July 1, 2010.

My commentary:

• The market is still a seller’s market. There are those who want to tell you that the market has been softening of late, but anyone who is ‘on the ground’ working the market will tell you it is not. 60% sale: list ratio on the east side (C08) is discouraging if you are a buyer.
• Inventory is still a problem. Downtown east had a big drop from last year in terms of units available for sale, just like the month of May showed. Why is no one selling in this town?
• Interesting the the median and average prices in downtown east (C08) and west (C01) are very similar. Is the gap between the east and west narrowing?

With no end in sight to the cheap money (i.e. low interest rates) in this country due to the still anemic U.S. economy and our strong Canadian dollar, I see little chance of a slow down in the market over the next 6 months. Agree? Disagree? I’d love to hear your thoughts. Please contact me or leave a comment.

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How to make $100K in 3 Months

There are dozens and dozens of units available for sale at Festival Tower. Most have been sitting on MLS for months as assignments (tricky to sell at the best of times), but now that the building is registering in a matter of days I expect these units will start moving quickly. I noticed something quite interesting looking through the sales data for a client – one of the bigger 2 bedroom units on a high floor sold in March as an assignment for $945K. Another one of the same floor plan also sold around the same time for about $1.03M, and just this week another one of this floor plan came up as sold for $1.05M (interestingly as I am writing this blog post I noticed the sales price has been removed and it now says ‘sold conditionally’).

So what happened? Seems to me the person who bought for $945K in March is up at least $100K in just 3 months time. Also it occurs to me that selling by assignment is a crap shoot at best – buyers and sellers alike are dealing with very limited an imperfect information and ‘fair market value’ is a very hard thing to determine.

This blog post is really designed as an illustration to show why I preach to my investor clients that the best time to sell your pre-construction purchased condo is 6-12 months after registration.

Reasons:

1. 1 year is the length of a typical lease. Assuming a 3-6 month occupancy period for most condos, selling 6-12 months after building registration will align perfectly with the end of that lease.
2. 6-12 months gives time for the dust to settle in the building (literally), and for the common areas to be completed. Common areas do add value to your property, make no mistake!
3. Allows time for the resale values of a building to get established. Much of this is driven by supply and demand principles – many investors selling at first, and few buyers aware of the building because it’s brand new.
4. To qualify for the HST/GST rebate as an investor, most lawyers will tell you you need a 12 month lease signed.

We see this pattern time and time again with new buildings when they first are finished – those who sell first tend to undersell. Those who are patient and wait reap the rewards.

Questions or comments? Thinking about selling your investment condo this year? Contact me.

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The Elephant in the Room: HST

NOTE: the following blog post is not to be considered legal or tax advice. I am not a lawyer or an accountant. I’m writing this strictly for informational purposes only. Always consult a lawyer when purchasing pre-construction real estate.

ANOTHER NOTE: If you find this article confusing, good. That’s the number one point I’m trying to make: the HST on new condos is very confusing and it needs to be fixed.

This is a subject that very few people in the pre-construction condo industry are talking about, but one that could actually have major repercussions on our industry over the next few years. HST and how it affects new condo purchasers, specifically those purchasers who are investors (i.e. up to 80% of the market right now), is a terribly unclear issue. When the Mcguinty government introduced the HST in July 2010, it was said that it would not really affect the real estate market. While this may be true in an overall sense, for investors of new condos, there can be serious implications to your bottom line.

The issue is essentially this: there is an HST rebate built into the price of every new condo sold in Toronto. The assumption is that the buyer of any given new condo is an end-user (they are buying it for themselves to use, not to flip for profit, or to rent out to a tenant), therefore they qualify for this rebate which the builder collects on their behalf. In reality we know that the pre-construction condo market is dominated right now by investor-buyers NOT end-user buyers. Investors do not qualify for this rebate, so the builders must charge them to account for this rebate, effectively increasing the price of their units significantly at final closing. Now, there is a process in place whereby investors can apply to get this extra money back from the government after the fact, but as you can imagine any application process involving extracting money from the government is long, painful, and tedious.

The key questions that are so difficult to get concrete answers on are:

• Who qualifies for the HST rebate in the first place?
• How much is the HST rebate? How is it calculated? How much do I have to pay extra if I am an investor?
• How do I apply to get my money back if I am an investor? When can I apply? What conditions must I meet? When will I get my money back? Do I get all my money back or only a portion of it?

If you talk to 3 different real estate lawyers, I gaurantee you will get 3 different answers as to how the HST rebate works and how it affects investors. This is a serious issue as thousands of investors are buying condos in Toronto every month, and I think many will get a shock in 2-4 years when they meet their lawyers for final closing and they are asked to write a cheque for thousands of dollars to cover the HST.

Why are there seemingly no clear answers on how the HST works for investors? Part of it can be explained by the fact that the HST has only been in effect for a year, and very few (if any) NEWLY purchased condos have actually completed and closed in the last year. In other words, very few lawyers have actually completed a final closing for a client who purchased a new condo during the HST era which began July 1, 2010.

Toronto real estate lawyer Stephen Shubb has done his best to explain how the HST works (and I think he did a pretty good job) on his website: HomeLegalCost.com. Essentially his explanation boils down to this: if the purchase price is less than $450K, you will get the full rebate back after the fact as long as you rent it out for at least 1 year after final closing. So you will be in the same position as the end-user is, but you have to pay up front and wait to get your money back. If your purchase price is over $450K (which many units are of course in Toronto), buyer beware! You may have significant additional costs at final closing that you might not be getting back.

Call me crazy, but I actually believe that someone up there at Queen’s Park might be reading this blog (especially with an election coming). With that in mind, I am calling on the Ontario government to do the following:

• Come up with a clear statement and communication to the public about how the HST will affect buyers of new condominiums in Ontario.
• Come up with a clear statement and explanation for the real estate law industry (lawyers) so they can explain it to their clients
• Increase the limits on who qualifies for the full HST rebate. $450K is a ridiculous upper limit in a city where the average single family home costs about double that
• Get rid of the application process for getting back the HST rebate for investors. If the rebate is in fact the same as for end users, why complicate the entire process, create unnecessary bureaucracy at a great cost to the public, just to get the same result in the end?

Questions or comments? Totally confused? Please contact me.

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The Manhattan Theory

Is Toronto on its way to becoming just like Manhattan? This question has been asked for years now, and the comparisons can be made that Toronto is a sort of ‘mini New York’ – a major financial and cultural centre, the heart of a mega-region, and home to some really expensive real estate. But are we moving away from being an affordable city for the middle class to a city built primarily for the rich? Will $1000 per square foot to purchase a mid-grade condo and $2500/month to rent a studio soon become the norm here?

I’ve had some interesting conversations with some of my clients with international experience lately, and here are some of the sentiments and theories that they are espousing:

• Like Manhattan, prices and demand are rising to the point where Toronto could perhaps become a city where much of the real estate is owned not by individuals, but by corporations
• Could we reach an average price level where home ownership becomes a possibility only for the wealthy? – i.e. the first time buyers market will cease to exist (can’t make these condos much smaller than they already are!)
• Will first time buyers will be forced to look outside the downtown, (as is the case for many in Manhattan), live in the inner suburbs for years before saving enough and building enough equity to move back into the city?
• What about investors? It is taking higher and higher down payments to get condos to cash flow – will this continue, or as prices rise, will we finally see rents rise as more and more would-be buyers are priced out of the market and forced to rent?

Sorry for the random collection of thoughts, but these are some of the talking points I’ve been having lately with some of my clients. I’d love to hear what my readers think about this subject and where people see prices, rents, and the first time buyers market going in the next 5-10 years. Leave a comment or contact me!

Image from photos4travel.com

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Market Snapshot: May 2011

The sales statistics for the month of May are in from the Toronto Real Estate Board for the resale market. As usual, I am only concerned with looking at the downtown condo sales as the stats for a metro area of 5 million people tells us nothing really about the downtown condo market.

My observations for this month’s stats:

• Most interesting to me as always is the inventory level. There were 183 fewer condos available for sale downtown in May versus last year, or about 11% less inventory. Low levels of inventory is a constant problem in this city. Those who keep harping on about ‘they are building too many condos!’…obviously don’t read my blog.
• Prices are up marginally versus last year (both average and median prices)
• Sales:Active ratio is about 38% for downtown total, which statistically indicates a ‘balanced’ market (as usually defined by about 25-40% Sales:Active ratio). This may explain partially why some listings sell with multiple offers while others sit for 3 weeks or more without an offer.

Takeaways:

Buyers - You still need to act quickly and be ready to engage in a bidding war for the best listings. I don’t see this changing much over the next 3 months.

Sellers - If you price your property right and prepare your property for sale correctly, you can still acheive great results, but it’s no longer a market where you can just throw anything out there and expect it to sell for top dollar in a week or less.

Investors - Watch for those properties that have ‘slipped through the cracks’ with DOM (days on market) over 20. These sellers may start to believe their Realtors who tell them ‘the market must be changing!’ and you may be able to get some leeway with sellers.

Questions or comments? Contact me.

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Market Snapshot March 2011

The above chart shows the latest data on downtown Toronto condo sales from the Toronto Real Estate board for March 2011 as it compares to March 2010. C01 is considered ‘downtown west’ and C08 is considered downtown east.

A few observations:

• Downtown west is always the most relevant data to look at when gauging the downtown condo market. The vast majority of sales downtown are in downtown west (C01). Downtown East (C08) is not great to look at on a month-to-month basis as sample sizes are quite small. It is quite common to see very different trends in downtown east versus downtown west (as is the case this month)
• Active listings are up, but so are sales and prices in Downtown west
• On average, prices have gone up about 6.6% since last year at this time in Downtown west
• The downtown west market once again outperforms the overall Toronto Real Estate market (where are you planning on investing this year?). Sales for GTA are DOWN 11%, and prices up 5%
• It’s still basically a seller’s market in both downtown east and west with the sales: listings ratio still hovering around 50%. Anecdotally, the number of ‘quality listings’ remains incredibly thin, while “investor” buildings have plenty of units available for sale.

I hope you find this information useful. Questions or comments on the market? Contact me or leave a comment below.

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Quality Investments in Pre-Con Becoming an Endangered Species

Hype-driven marketing seems to be at an all time high in the pre-construction condo market. I am finding it harder and harder to find quality investment opportunities to recommend to my clients. This at a time when a new condo project is launching almost every week. Prices are soaring. Suite sizes are shrinking. Every agent and their mom is calling themselves a “VIP” agent. Something has got to give.

I am getting more and more calls from buyers who have felt pressured into signing contracts to buy pre-construction condos without really thinking through what they are doing. So far this week I talked to 2 people who were in their 10-day rescission period and they flat out told me they don’t trust their agent who they used to buy the condo and were unsure if it was a good investment. They attended one of these hype-driven “VIP” sales events (VIP has really become a meaningless term), everyone there told them it was a great investment and they would make a lot of money, and so they signed on the dotted line. [Side note: Often I find that the agents used in these scenarios know nothing about the pre-construction condo market (or worse, the condo market in general), and there is often a family connection - the agent is the buyer's uncle, friend's uncle, god parent etc. Hire a professional who you trust!]

I am not thrilled with the tactics some developers are using to sell their projects, but more importantly, it’s the pricing that is automatically precluding me from recommending several projects to my investor client base. Buying at $600+PSF when comparable resales are selling at less than $500PSF just doesn’t make sense. To be clear, I am not in the camp that believes it is only a good investment if pre-con prices are LOWER than equivalent resale – I just think the gap needs to be about $50-$75PSF in most cases to make sense from an investment perspective.

Questions or comments? Wondering what projects I am recommending to my clients for investment and which ones I am not? Please contact me.

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The Importance of Infrastructure

If you are planning on investing in a condo in 2011, there are many obvious factors to consider: builder track record and reputation, location, price per square foot, building and suite features, layout/floor plan etc. There is one factor that I always consider when buying real estate and that is neighbourhood infrastructure (specifically transportation infrastructure).

This includes roads, transit lines (subways, bus routes, streetcars), access to highways, pedestrian walkways, bike lanes/routes, water access (if near the lake), and any future development plans or potential plans for vacant or underused land. Without solid infrastructure in place, a neighbourhood can stagnate and become segregated from the rest of the city, making it less livable and result in slower appreciation rates compared to other better serviced areas.

Liberty Village is a good case study. Liberty Village is a master-planned community that I believe is in danger of becoming a victim of its own success. There is basically only one way in and one way out of Liberty Village, and that is via Liberty Street. Whether you are walking, driving, biking, or taking transit, you are probably on Liberty Street coming and going from this area. The reason for this is simple: the pie-shaped area is bounded on 2 sides by two rail lines and the Gardiner Expressway. Gridlock and traffic congestion is becoming a real issue in Liberty Village (ask anyone who lives there).

There are now plans underway to add a new road to Liberty Village (when was the last time a new road was built in Toronto?!), as well as a pedestrian/cycling tunnel or bridge across the train tracks. This will be something to watch in the years to come and if I was an investor in the neighbourhood, I would be calling the city councillor to push these projects through.

One of the reasons why I am a big proponent of the Regent Park revitalization is that the neighbourhood infrastructure is so strong already. The neighbourhood has been isolated from the rest of downtown for 50 years not by physical barriers, but by social ones. Think about it: streetcar lines on Dundas, Gerrard and Parliament will connect residents to just about anywhere in the city, east or west. Sackville, Sumach, and River streets will all be through streets that will connect the neighbourhood directly to Cabbagetown, Corktown, The West Don Lands, and the Distillery District. Most people don’t realize just how connected Regent Park actually is to a plethora of excellent Toronto ‘hoods, and soon enough will be an excellent ‘hood in itself!

So far the value of real estate in Liberty Village has not been hurt at all by the massive influx of condos (and people, and cars etc), but that is not to say that as thousands more move into this area the ensuing gridlock will not start to affect real estate values in the future.

Questions or comments? Please contact me.

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One Came by Fax

The spring market doesn’t officially start until, well, spring. But anyone who is shopping for a condo (or a house) in Toronto knows that the market is H-O-T right now, and multiple offers are not the exception, but the norm. Over the years of working with buyers and sellers in multiple offer situations, you learn a few tricks. If you are a buyer in a multiple offer situation, there are four sweet words you should love to hear:

“One came by fax”

Sending an offer by fax in a multiple offer situation is the real estate equivalent of ‘mailing it in’. The agent is essentially saying, my clients’ offer is not strong enough to stand a chance of actually being the winning offer, so I’m not going to waste my time by actually showing up for the offer presentation.

At the precise time of bidding, make sure you find out a) how many offers there are on the property and, b) how many are being presented in person vs. by fax/email. If you hear some or all of your competing buyers are submitting their offers by fax, consider your own offer carefully before submitting! You don’t want to be the offer that makes the seller’s say “One offer came in and blew us all away!” (Side note: Sellers-NEVER say this in front of a buyer or buyer’s agent). For example, if there are 3 offers, and you are the only one who shows up in person to present your offer, there is a good chance the other two offers are going to be weak ones, so consider your offer price accordingly. An in-person buyer is a much more motivated and serious buyer than one who is not present (as a general rule).

When I hear an offer was faxed in, I will automatically discount that offer when advising my buyer-clients on an appropriate ‘winning’ offer price. This is more relevant when in an offer situation with 2-4 offers, but it becomes less relevant when there are 5+ offers.

Questions or comments? Please contact me.

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