Still waiting for the condo market to crash? Here are 5 reasons why you will be sorely disappointed.
You know that one friend of yours who keeps on insisting that the condo market is going to crash? Listen to this episode to hear 5 reasons why this is not going to happen. While other segments of the real estate market have shown some early signs of weakness lately, the condo market has not and there are several key factors which point towards much higher prices still yet to come.
2:23 Inventory Levels.
4:09 Existing resale condo market side.
9:30 Major mortgage changes that the government instituted.
11:40 Rental rates.
13:45 Interest rates.
Andrew la Fleur: You know that one friend of yours that still thinks the condo market is going to crash? Well, here are five reasons that you can give them on why that’s not going to happen on today’s episode.
Speaker 2: Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.
Andrew la Fleur: Hi and welcome back to the show. Thank you again for listening and thank you for your ongoing support of this show. The show is for you, the condo investor, and we’re here to educate you, and to inform you, and to tell you what’s really going on in the condo market in Toronto.
On today’s episode, as I mentioned in the intro, we’re going to be talking about five reasons why the condo market is not going to crash. There’s a lot of chatter a little bit more than usual and there’s always people out there and headlines out there saying the condo market is going to crash. This is just the reality of life in Toronto. There’s just this constant belief that the market is going to crash. It’s been this way for at least the last 10 years, probably for the last 20 years, since probably 1996 or so. This has just been a topic that a lot of people are latched onto and a lot of people just think we are building too many condos and the whole thing is going to come down.
As we talk about time and time and time again on this show, there are many reasons why that is not true. That is not going to happen and why that hasn’t happened to date. The market is one of the best markets in the world. We are one of the most fundamentally sound real estate markets in the world. We have one of the best banking sectors in the world and we should be proud. We have a fantastic market. It’s a great opportunity to invest in. So many people have done so well in this market and will continue to do well if they stick to the fundamentals, they make good decisions and if they buy properties in good buildings and good locations and if they buy the right units of course.
Let’s jump into it. Five reasons why if you’re waiting for the condo market to crash, you’re going to be sorely disappointed. First reason, number one reason is inventory. Inventory levels are near or at historic lows. If you are a buyer out in the condo market … Let’s start with pre-construction. If you’re a buyer looking to buy something pre-construction, there are very few choices.
I just had a meeting with a buyer yesterday at a couple of downtown sites. They’re looking at buying few units for their children, three children. Three units is what they’re trying to purchase. I said to them, “A year ago, if we’re having this meeting or having this conversation, I could easily take you to five or six, maybe even as high as eight or 10 great sites downtown where you could purchase three units in. Today, your choices … Unless your budget is like a million dollars, your choices are very, very slim pickings. You have really two or three choices to buy anything downtown. The inventory is just not there.”
If you look at the statistics from Urbanation, from Altus Group, different groups that track the market, if you just look at the raw numbers, the numbers are scary low. If you look at the number of unit of buildings, new buildings that are finished, that have so-called standing inventory, condos that are finished but they’re not sold, it’s something like 600 units in the entire Toronto, in the entire city, 600 units which is one of the lowest numbers from the last 10, 15 years. If you look at the resale condo market side, existing resell condos from Toronto Real Estate Board numbers, again, we talked about this in a podcast I think last week just going over the stats for the downtown condo market, the resell market downtown for condos is firmly, firmly in seller’s market territory. The sales to listing ratio is way, way high. The months of inventory is way, way low.
There’s this belief out there that the market is slowing down and there’s big changes in the horizon. Some of the real estate bearers out there are just licking their chops. This is our moment, guys, of glory. This is what we’ve been waiting for all these years. This is what we’ve been saying. It’s complete nonsense. It’s a psychological shift that is taking place in the market. We see this every time the government institutes a change to the market as they did a couple of months back at end of April. The market will adjust. People will realize they still need a place to live and the market is going to be going back to normal as I’ve been on record of saying within the next few months. The detached housing market is slowing down a bit. Again, looking at the downtown condo market in particular, which is what we’re most interested in as condo investors, firmly in seller’s market territory. Go out there. Try to buy something. There’s nothing to buy.
I interviewed Mark Savel, great resell agent. He was telling stories of bidding wars with seven, 10 offers, condo selling for a hundred thousand over asking, records being shattered, records that were just created a couple of months ago in the so-called peak of the market. Well, we’ve just past those. Again, take a look at what is actually happening. Forget about the headlines. Forget about what your friend, or your cousin, or your aunt told you and look at and talk to experts that are actually in the market as to what’s actually happening. When you do that, you find that again we are firmly in seller’s market territory. The pickings are extremely slim for buyers. There’s just no inventory.
As I was saying to a colleague yesterday, we’re talking about the state of the market, even if there was some kind of dramatic cataclysmic event, World War III, or some major recession, or something broke out, I don’t see any change happening in the condo market, especially downtown because there’s just no inventory. There’s no standing inventory. In previous times when the market has come off of a high and things have leveled out or plateaued for a time, I’m thinking about 2008, maybe 2012, there was a little bit of a slow down, there was tons of inventory out there and there were new projects piling on top of new projects on top of new projects and more and more inventory was being added. Yes, the market did slow down but right now there’s no inventory. There’s nothing out there to purchase.
Even if there were some cataclysmic event to change the economic and discussion of Canada and people start losing their jobs or something like that, there’s no inventory. There’s no supply out there so you’d have to have 10, 15, 20 projects a month, new ones being added to the market in the slow market for there to be inventories starting to pile up to make it so that it would become a buyer’s market. We are so firmly into seller’s market territory because there’s no supply out there. That, again, if you just look at the supply equation in particular, you see that the market is not going anywhere. Prices are going to continue to rise. If you’re planning for anything different, you are going to lose. There’s no other way to say it. You’re not seeing the market as it is. That’s the main first reason is the inventory.
Second reason is affordability. Again, detached house prices have absolutely skyrocketed. Low-rise housing prices have skyrocketed over the last two years in particular. They’re out of reach for most people. It’s never going to happen for most people now. If you already own a house, if you bought before the last two years or if you’re somehow able to manage to buy in the last two years, congrats to you. It’s amazing. You’ve done well but the reality is your peers and your colleagues will probably not be able to do the same, most of them, because that’s just the reality. Prices are out of reach for most people now. Condos are the future. High-rise living is the future. Smaller spaces are the future. Less square footage is the future in terms of what is normal for people to buy and to live in, and that is where things are going just due to simple economics of what people can and cannot afford.
Another thing that we forget about, we have such a short-term memory when it comes to these things, and that is the major mortgage changes that the government instituted not even a year ago, just in the last October. I believe it was the last October when the government came out and they said, “For the mortgage qualification process, you had to qualify at the posted rates.” If you recall, I did many podcast on it at the time, the big mortgage changes. Effectively what it did was it cut purchasing power by about 20%. If you could afford a million dollar place one day, the next day you could only afford 800,000.
It effectively created, as I said, at the time and it’s definitely born true now months later, this massive new influx of condo buyers entered the market that weren’t there before. You have this huge influx of new condo buyers into the market and again that is driving the demand side of it and that is shrinking the supply side of it as more and more people who are going to buy houses have been buying condos over the last six months instead because that’s the only thing that they can afford and it’s a big factor … It was a huge factor in changing the affordability equation for everyone across the board. This affected everyone.
The government again … Every action has a reaction and this is one of them. They took the heat off the low-rise housing market somewhat, but they just shifted that heat over to the condo market. Again, the government just keeps plugging one hole and the water comes out another hole. You can’t stop the flow at some point. We’re dealing with a growing city and we don’t have enough housing to fit all the people that are coming in. That’s why prices keep rising across the board and that’s why it’s going to continue. That’s the second reason.
Number three here. Rental rates are still soaring. Rental rates are still soaring. Take a look at rental rates. Go to condos.ca and check out their real time live stats on the rental market. You’ll see that if you go and look at … I’ll do it right now as I’m talking. If you look at the rental rates for Downtown Toronto, they are currently rising at a pace of 10% a year, 10% a year. That is approximately five times, maybe almost six times the current rate of inflation. Hello. Wake up, everybody. Rents are soaring in the city. This has been going on now. Double digit rent increases for a good six, eight months now in the downtown core. Again, to your friend who keeps saying, “They’re building too many condos. This is all going to end badly.” Well, if they’re building too many condos, why are prices and rents rising? It makes no sense. We’re clearly not building enough condos.
Rental rates are rising at about five or six times the rate of inflation. This is a huge factor into making it a great condition to be a condo investor obviously, but also it’s why prices are going to keep rising because more and more people who are renting are looking for ways to get out of renting and to get into ownership i.e. buy a condo instead of rent a condo because rents are just so expensive. If rents continue to rise at a rapid pace, then that’s going to put more and more pressure for people to figure out how to get out of renting and get into purchasing. It’s going to create more demand for purchasing condos and that is going to continue to rise, elevate the pricing.
The next reason and the reason number four is interest rates. Look at interest rates. Interest rates are still at historic lows. I just saw one of the mortgage brokers that I work with just tweeted out that they put somebody in a mortgage just this week at a variable at 1.8%. 1.8%. Inflation rate is around that. Basically you’re getting free money. Money is almost free. It has been almost free for a long time, many years now, but we’re lowered than we were a year ago than year before that.
The point I really want to hit home on this interest rate thing is there’s a lot of chatter now that the Bank of Canada is dropping more and more hints. This whole game that they play with the markets in terms of dropping hints but not saying what’s really happening, it’s comical to watch, but they’re basically supposedly dropping hints that interest rates are going to go up. There’s some corners of the market in the tweetosphere that are saying, “Oh, here we go, guys.” Again, the real estate bearers are latching onto this kind of thing saying, “Here we go, guys. This is it. This is the end. Interest rates, subprime mortgages, all these people are … Just like America, interest rates are going to go up. People can’t pay their mortgages. It’s all going to come crashing down.” Again complete nonsense. Ridiculous.
If interest rates do go up at all, we’re talking about a quarter percentage point. We’re talking about you can buy one or two less lattes per month than you were before. A .25% increase in the mortgage rate, first of all, it only affects people on the variable rate side so that is actually a small percentage of the market. It’s a high percentage of investors like you and I because we’re smart enough to realize that variable rate is the way to go and to generally stay away from fixed rates. But, for the average Joe who’s buying a home or condo for themselves to live in, something like 70, 80% of those people are taking fixed rate mortgages. They have fixed rate mortgages. The increase in the interest rate is not going to affect them at all. It’s only going to affect the small percentage of people in the variable side, and it’s barely going to affect them at all. .25, even .5, .75, this is very minor increases.
Again, we have very short-term memory. Back in the ’80s, in ’90s and even in the early 2000s, Bank of Canada would change interest rates by a percent or two whenever. It was not a big deal. Now, because interest rates haven’t moved for so many years and they’ve been effectively at zero for so many years now, the slightest little change, everyone gets all in a tizzy and they think this little tiny 0.25% change is going to suddenly have this massive impact on the market or something. It’s not. It’s not going to change the market at all. Even if the trend is more interest rate increases over the next year or two like let’s say they raised it several times, they’re going to raise it slowly and they’re going to raise it over time. People will adjust. Interest rates are not jumping up 2% next week.
This hysteria over a .25% potential, not even confirmed yet, potential interest rate increase that will affect a very small percentage of the market is silly. Again, all this to say interest rates are very low. Even if they go up, they’re still extremely low, and there’s nothing, nothing on the horizon that suggests that any interest rate factor is going to change the market in a significant way so let’s just get rid of that whole conversation. It’s totally ridiculous.
Okay. There you have it. Actually. That consolidated some of my points. I think I said I was going to do five, but I think I consolidated them down to about four. There you go. Efficiency here on today’s podcast. I hope you enjoyed this episode. Please go ahead and share this with that person that you know that’s waiting for the condo market to crash and encourage them to get out there and buy something before prices continue to rise. The regret that people have is just going to continue and it’s going to get worse and worse if they’re not taking action, taking steps to get into the market today, to invest into the market today because the opportunities are still there. The opportunity is still great and the room for growth and the potential for growth is still very, very high. Okay. Until next time. I hope you have a great week and we’ll take to you soon.
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