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3 Powerful Reasons Why The Toronto Condo Market Did Not Crash

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There has been a lot of talk over the last year about how the condo market in Toronto was due for a major correction.

The big buzz earlier this year with US based hedge funds was ‘shorting’ the Toronto condo market. Today the headlines read that this gamble was a complete failure and anyone who bet against the market in this way is a loser. (Side note: several US hedge funds contacted me in the past year to discuss the condo market and this strategy. Needless to say I thought they were nuts.)

Now just this week the stats came out that prices are up for Toronto condos by 10.7%. Condo rental prices continue to rise as well in the 2-4% range. Which is leaving many of the real estate bears (those who believe that the market is going to take a prolonged downtown or correction) scratching their heads in bewilderment.

What the heck happened to the great Toronto Condo Crash of 2013? Here are 3 reasons why the condo market did not crash this year and why I believe it will continue to be strong in 2014.

1. EVERYONE and EVERYTHING is Moving Downtown

This point I can’t emphasize enough with people I talk to on a daily basis who are thinking about investing in a new condo but they feel like they missed the boat or that it’s not possible to make a good return like it was a few years ago. People want to live downtown. Businesses want to be downtown. Institutions and schools and churches and tourists want to be downtown.

So, why are sales down this year vs. last year? Simple, everyone is renting instead of buying. But as an investor in the market, you win either way. As long as more people are moving in than new dwellings are being built to house them, you win.

There is no land left to build homes in the city. There are zero rental apartments being built in the city. The only answer to our housing problem is condos.

2. The Rental Market In Toronto Has SUPER HUMAN STRENGTH

The cash flow that investors are getting on units they close today that they bought 4 or 5 years ago is INSANE. If you had told me 3-5 years ago that studios would be going for $1450/month and 1+dens with parking for $2000/month I would have said you were insane. If you talk to any investor who bought 3-5 years ago and are renting their units in today’s market at these prices the one thing they will all say to you is: I WISH I BOUGHT MORE!

Rentals continue to rise despite the fact that according to TREB there were 21% more condos available for rent in Q3 than the year before. Think about that number: 21% more inventory yet prices are still rising. Imagine, what will happen to rental prices in 3 years when we pass through the current boom in construction and enter into the lull that will occur because new condo sales have fallen so much in the last 15 months.

3. Construction Capacity Prevents The Market From Being FLOODED With New Condos

We have a problem in our industry, we like numbers. We are addicted to them. We like to track things and we like to publish our findings every month, every quarter, every year. Stats are a very good thing of course, but unfortunately in the wrong hands, stats can be a dangerous thing. 

One such dangerous stat is units scheduled for completion. It is the one stat that year after year is published in mainstream media articles with reckless abandon, and unsurprisingly so. After all, “Record number of condos scheduled for completion next year” or “Onslaught of condos set to flood the market” makes for a great headline. However, no one ever follows up in subsequent years to see and report on how many condos actually were completed vs. how many were ‘scheduled to complete’. If they did, here’s what they’d find out:

Every year there is supposed to be a tsunami of new condos completed that will cause a major market correction. Case in point:

The forecasts in 2010 called for around 21,000 units to be completed in 2011. In reality? Only about 15,000 completed.

In 2011, the forecasts for 2012 called for around 27,000 units to be completed. In reality? Only about 15,000 completed.

In 2012, the forecasts for 2013 (this year) called for around 32,000 units to be completed. That’s double what typically completes in a given year – all hell was going to break loose! …you get where I’m going with this…we are almost through 2013 and we are on track for, you guessed it, around 15,000 -17,000 completions!

You see, “scheduled occupancy” is a very loose term in the condo world. If a condo misses it’s originally stated occupancy date by 12 months or less that’s considered very good! 2 and 3 year delays on a 3 year construction schedule are the norm when you are building 300+ homes straight up into the sky on a postage stamp sized property.

All this leads me to believe that “construction capacity” is a very real thing in this city and that completing more than about 20,000 condo units in one year will prove to be a very difficult challenge over the next 5 years meaning I just don’t see a scenario with a flood of units coming online at one time causing a supply crisis in the market.

 

Andrew la Fleur

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