Right Now Is an Amazing Time to Invest in a Condo; Here’s Why.
Some people still believe that we are building too many condos in Toronto and that prices will fall. They are more wrong than ever. There are many reasons why condo prices are about to “pop” in 2017 and smart investors should be taking advantage of the market right now.
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| Andrew la Fleur: | It is an absolutely amazing time to invest in a new condo in Toronto right now. I’ll tell you why on today’s episode
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| 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.
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| Andrew la Fleur: | Welcome back to the show. Thank you for listening. On today’s show I’m going to be talking to you about this idea that I believe right now … Here we are approaching the end of 2016. We’re getting ready for the last 4 months of the year. The last season of real estate, the fall market. It’s an absolutely fantastic time to purchase or invest in a condo right now, especially a preconstruction condo. The simple reason for that is that I believe that we are right on the precipice, right on the edge of a major increase, a pop, in condo prices. There are several reasons for that, which I point to get into in today’s episode.
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| Why do I believe that in 2017 condo prices, especially for new launches a new condo projects coming out in 2017, are going to be priced significantly higher than the condos that are available market right now. There are several factors for that. Let’s get into that today. There’s a couple of great articles which I do want you to read as well in the show notes for this episode. You can always find the show notes for every episode over at truecondos.com/podcast. One of the articles was written by a good friend of the show and interviewee on the show in one of the archived episodes, George Carras. George wrote a great article in the Toronto Star this past weekend. The headline was, “If you think condo prices are high now, fasten your seatbelt.” The other great article, which I linked to the title in The National Post, the title was, “Toronto’s condo inventory at a decade low as buyers priced out of ground-level housing eye high-rise units” You definitely want to check out those, further reading on this episode. A lot of the themes and things will be drawn from that.
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| The point I want to drive home to you if you’re thinking about investing in a condo is don’t delay. Now is an absolutely fantastic time to get into the market. If you wait until next year or if you’re one of those people that are on the fence waiting, waiting, waiting for the market to correct itself or to crash or something along these lines as I hear so often from so many people they are waiting, waiting, waiting, waiting, many people for years and years. In some extreme cases, decades. Now is the time to jump in. It’s not going to get any better. Even if you can save a little bit more money if you’re able to purchase now now is definitely a better time then it will be next year. There are reasons for that and let’s get into that right now.
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| First of all, input costs. Input costs are going up quite significantly. This is something that a lot of people in the general public would have absolutely no awareness of per se, is what’s happening behind the scenes in the machinery of the condo market and the development industry. Input costs are rising. Of course, if you’re producing a product and your costs go up you’re going to raise prices. You have to raise prices because you need to make your profit margins. If you’re a developer your investors need to see certain margins, therefore when your costs go up then your prices must go up accordingly as well or something has to be cut elsewhere to make up for the difference. Generally speaking, builders being on very tight margins as it is and cutting everything that they can whenever they can there’s nothing really more to cut. It’s prices that will be affected and prices are going up.
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| What input costs am I talking about? First of all, labor costs. Labor costs have gone up quite significantly over the last few months. You may have heard there were a number of strikes by different trades, the drywallers being a big one this past year. Those unions have successfully received new contracts and their wages are going up. From developers I’ve talked to in the industry they are saying that those labor costs are going to be going up around 3 to 5%. Excuse me, the actual effect on prices could be in the 3 to 5% range, the labor costs have gone up more than 3 to 5%. What it represents to the buyer is around 3 to 5% increase in prices. That’s one thing.
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| Development charges are up. Development charges are continually going up across the GPA. All the municipalities are raising those development charges. There was an interesting article in the Toronto Star as well, I’ll link it in the notes as well, written by Bob Aaron, the real estate lawyer who writes articles in the Star every week. He was talking about how somebody wanted to put an apartment unit in their property, basement apartment something like this. They were going through the city to do it all properly and the city was requiring something like $160,000 in taxes, fees, development charges, levies, what not. $160,000 in just pure taxation to add a residential unit to a property officially and doing it all above board. Absolutely insane.
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| Again, this is something I think the public needs a lot more education on an understanding. Similar to the way when you go to the gas station and you see that little pie chart that shows you how much of the price that you are paying is actually profit to the gas companies and whatnot and how much of it goes to various forms of taxation and each government taking their piece of the pie. You look at that pie chart and you realize, “Wow, if we cut all this government stuff out of this product we would have a dramatically cheaper product. It’s the same thing in housing. People don’t realize that one of the reasons why prices are continually rising is because development charges and taxation related to development on developers is also continually rising. Developers will absorb some of those costs but most of those costs are ultimately passed on to purchasers. Again, developers and their investors requires returns on their money.
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| When the city comes along and says, “Okay, instead of $100,000 development charge it’s now going to be 110 or 120 this year.” What are you going to do? Your investor isn’t going to say, “Oh, okay. I’ll just not make as much money anymore.” No. They require certain returns otherwise they’re taking their money elsewhere where they can get those returns. The costs are passed on to the purchasers. They always will be and they always have been. This notion that you can just continually tax more and more and more on developers and developers are the big bad entity that make too much money and we need to take some of that money away from them or something like this is total and utter nonsense. It’s economic suicide to keep doing that. You’re killing the golden goose. Unfortunately, this is a reality and this is a huge reason why real estate prices continually are going up in the GTA. Development charges are astronomical and the public just is not aware of how high these charges are and how much they are affecting real estate prices.
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| Hopefully on the flipside of that, to be fair, these development charges hopefully are going to create better, more livable cities and that money is hopefully being used to do good things and to continue to make Toronto one of the greatest cities in the world to live in in the GTA, one of the greatest places in the world to live in. At some point this is going to kill the golden goose so to speak. Development charges are up, labor costs are up, what other input costs are up?
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| Land costs, of course, are soaring. If you hear about the numbers the developers are paying for land and property to build on today compared to what they were paying a year ago, 2 years ago, 3 years ago, 5 years ago, Easily land costs have doubled in the last 4-5 years. Easily. In some cases much more than that. I’ve got a ton of stories that I’ve heard of developers who bought a piece of land maybe 1 or 2 years ago for 10 million and now they’re flipping it today without having done anything for 20 million. If you’ve got change to spare than just buying land and sitting on it is certainly a good way to make a lot of money in the market that we are currently in. Land costs are absolutely soaring.
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| Again, projects that are launching in 2017, 2018, they are launching on land that was purchased in 2016. Those properties, by definition, are going to be priced significantly higher. I’ll just give you one concrete example. Again, one of my favorite projects right now is Minto Westside at Front and Bathurst. Great value there. Great prices still there. Excellent units, great builder, great location. Priced very competitively. Many units are priced much below the resale prices in the area. That property was purchased by the developer several years ago and they are able to sell at certain prices and still make a profit.
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| If you look down the street Tridel just bought the rights to develop the residential portion of THE WELL development at Front and Spadina. Massive project there, mixed-use project, really exciting project. A lot of people are really looking forward to that. It’s going to transform that part of the city. You just look and see, the prices that Tridel is paying for that land is much, much higher than what Minto paid for the land just a block away a few years ago. Naturally it’s just common sense to know that the prices that they’re going to have to sell the condos at on that property are going to be much, much higher, whether it’s launched in 2017 or 2018. Whenever those condos hit the market you know they are going to be priced much, much higher. That is, again, an opportunity for the smart buyer to take advantage of in the market right now. Those are input costs that are going to affect real estate prices moving forward.
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| What else is going to affect prices moving forward? If you’re looking at preconstruction condo prices … Again, it’s a product commodity. If you’re out there looking at the market look at what else that could potentially buy. The competitive offerings, the competitive types of properties out there. That would be resale condos or freehold homes. Other types of housing and to a lesser extent rental units, rental prices. If you look at all 3 of those things resale prices in condos are up this year. The latest quarter was 10%. Depending on how you calculated and what market and segments you’re looking at is anywhere between 6 to 10% as resale price increases this year in the condo market. We talked a lot about that on this podcast.
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| If you look at single-family home prices, of course, we all know. It’s in our face every single day, it’s on our streets everywhere we turn. You can see it, you can smell it, you can almost feel the price is rising around you. They’re up like 20%. It’s absolutely insane. Earlier this year was 10 to 12% year-over-year and now the past couple of months it’s more like 20%. It’s absolutely insane, astronomical. For some reason people don’t like to hate on the resale freehold market and they don’t like to call that a bubble. They do like to call condo prices a bubble at, on the pre-con side, 3 to 4% increase prices. That’s a bubble but 20% increase in freehold homes not a bubble. Interesting.
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| Anyway, not to go down that rabbit hole but if you look at rental prices as well, Rental prices are up 3, 4, 5, 6% as well. As rental prices go up what are those renters going to do? They’re going to say, “Well, I might as well just buy something instead.” That will push demand from the rental site over to the buying side as well. All that to say that the alternative forms of housing are up significantly. Again, this is all pointing to the fact that prices of preconstruction new condos are also going to increase significantly. They do not operate in a vacuum as many people seem to think. The prices of one type will affect the prices of the other. That, as I’ve been saying for many years on this podcast, this continued 10 to 15% escalation in freehold prices will, and does, and is spilling over into the condo market and it will spill over into the preconstruction condo market as well, I believe, in 2017 significantly as more and more people are priced out of those other markets.
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| It’s like gravity, it’s like water. It will find its lowest point. The money will naturally flow to where things are most affordable. Right now, in case you’ve been living under a rock and not listening to this podcast, the type of housing that is most affordable, believe it or not, in Toronto right, is preconstruction condos. Preconstruction condos right now are the most affordable option. Assuming you have the deposit And assuming that you’re the buyer and you’re buying into the right properties you can get fantastic, fantastic value in the preconstruction market right now, today, at the end of 2016. I don’t know how much longer it’s going to last but my guess is by 2017 the party might start to be over on this amazing value that we’re seeing and the pendulum will start to swing back and there will be less value in the preconstruction side as prices rise significantly in this market.
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| Other factors that will affect it is just natural appreciation, inflation that will just naturally occur in any market. The 2 to 3% is just a normal, no matter what happens, condo prices are going to go up to 3%. Unless you’re in a recession condo prices are always going to go up by that small inflationary amount of matter what. The other big thing is not enough new supply. Again, in this article in the show notes talking about urbanization’s latest stats. Sales were up in the second quarter about 26% from the year before. It says in the article that sales would have been even higher but supply has been unable to keep up with demand. New projects fell by 9% from a year ago. Especially in the core, we’ve really seen this this year, there’s very little new projects, new inventory being added to the market.
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| Again, this is all contributing to what I think is a moment here in time where we’re going to look back and say, “Wow, prices really popped in 2017 especially compared to 2016.” We’re going to look back and say, “Wow, 2016. If you had bought a condo in 2016 there was a lot of value out there. There was a lot of projects and a lot of pockets where you could really get a good deal on a new condo. In retrospect, wow, you know what? It was actually cheaper than buying resale. It was way cheaper than buying a freehold home. With 20% down in many cases it was cheaper than renting.” That’s the situation that the market is right now I believe that’s why think it’s a fantastic time to buy a condo right now.
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| Naturally the next question is, “Well, Andrew, what should we be buying? What should investors be focusing on?” In particular I think the opportunity lies in projects like Minto Westside. There are certainly others out there but something like Minto Westside is a good example because the land was bought 2 or more years ago and it’s being built by a reputable builder. If you have projects like that where they purchased the land in a different market where land prices were much, much cheaper those builders are naturally going to be able to afford to be able to sell those units at cheaper prices, particularly reputable builders who are much better at understanding markets and weathering little blips and ups and downs in the market. If you’re buying in projects like that, in sites like that, you’re going to see amazing appreciation on those prices, especially when you see what new projects are coming out in 2017 and the prices that they’re going to be charging and getting in next year’s market.
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| It’s interesting as well. I will point out a market risk that I am seeing and something that is certainly a concern to be aware of as a buyer out there. That is buying what I call B sites from B developers. If you’re buying from sites that are not prime locations, not close to transit, employment centers, things like that. If you’re buying from B developers, developers who don’t have a long track record, those projects, I believe, are a little bit risky to buy into right now because, and this is something I’m hearing from a lot of developers, especially seasoned ones, is these small developers are not able to weather the storms. The increased input costs that are about to hit them. They were not able to factor these rising input costs or not savvy enough to factor them into their pro forma as they were planning on these projects.
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| I’m making a prediction here that we will see a handful, not a lot, 2, 3, 4 or whatever. You might see a few of these the sites, B developer projects that will be canceled or will be taken off the table and have to be relaunched at higher prices is may be a more accurate way to say it in the next 6 to 12 months time because some of these projects are just not going to be profitable anymore as these input costs have gone up. Developers are going to look and say, “Wow, I sold out this condo or I sold 78% of this condo but now all my costs are going up 6, 7% and that just wipes out my whole profit. I can’t build this thing anymore. I’m going to have to cancel it, go back to the drawing board, redesign the building, price a little bit higher based on my new input costs, and make a profit that way. If I build it as is, if I build it as I’ve sold it, I’m not going to make any money. My investors are going to make any money. If anything goes wrong whatsoever in the construction process, if there’s some unforeseen issues with construction, I could actually lose money on the project.”
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| That is bit of a trend that is something to watch for and something to be aware of as a condo investor in this market when you’re buying, in particular, from those non-top-tier developers that may be are not able to weather those kind of little blips in the market and the reality of the increased input cost that we are seeing in the market this year.
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| Okay, there you have it. That is today’s episode. I hope you enjoyed that. I hope you found that useful. Again, I hope that if you’re a condo investor that you continue to invest this year. If you’re picking the right projects, if you’re getting good value, I believe you’re going to see a big pop in prices, especially in 2017. That’s it for now. Until next time, have a great week. We’ll talk to you soon.
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| Speaker 2: | Thanks for listening to the True Condos Podcast. Remember, your positive reviews make a big difference to the show. To learn more about condo investing become a True Condo subscriber by visiting truecondos.com.
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