Could Condo Prices Rise 30% in the Next 3 Years?

Andrew: Recently, a prominent Toronto condo developer came out and publicly on record stated that he believes that Toronto condo prices would rise 30% in the next 3 years. You know what? I’m starting to believe him.

Voiceover:            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:                 Hi, and welcome back to the show. Once again, Andrew al Fleur here. Thank you for listening. Today, as you heard in the intro, I want to talk about this statement made by Barry Fenton of Lanterra Developments. Prominent real estate developer. One of the top condo developers in the city who came out very recently and stated that he believes that condo prices will rise by 30% in the next 3 years. Now, that statement raised a lot of eyebrows obviously inside the industry and outside the industry, and a lot of people are thinking, “How can this be? Is this really happening, or is this just somebody in the market, in the industry trying to pump up the market from within so to speak?”

I’ve been thinking about it for quite some time since he came out with that statement, and I’ve got a few thoughts on the issue. I talk to a lot of different people in the industry as you know, and as I bring to you most weeks on this podcast insider interviews with people, experts in the industry, so I’m having these conversations all the time, and I have some thoughts to gather on things that I’m hearing and seeing on in the market.

As I said in the intro, I am actually coming around and starting to believe that this could very well happen. We could see prices rise very significantly in the next 3 years. It might not happen overnight, it might not happen this year, it might not happen even next year, but at some point in the very near future, I do see a lot of factors coming together, a perfect storm if you will for condo prices where I do believe that we are going to see a significant jump in condo prices, particularly in the downtown core, so I want to look at 5 different factors here, reasons for why I believe that this could very well be happening in the next few years.

Number one is land prices. Land prices have been increasing dramatically in Toronto, especially in the downtown core over the last few years. I was watching an interview recently with Brad Lamb on BNN, and Brad Lamb, another prominent developer, he mentioned by his estimates that land values have gone up about 500% over the last 10 years. Think about that, 500% over the last 10 years. That means if they’ve just skyrocketed, so the cost of land is going up so much.

You have Barry Fenton himself who’s talking about on his interview where he made the statement that he was recently outbid to purchase a major landmark corner Yonge and Bloor in that area there on a multi-hundred … hundreds of million dollar land purchase, so you have … again, or just a few years ago, a $100,000,000 land purchase would be extremely rare, extremely … extreme outlier would make major headlines. You’re seeing this kind of 9-figure land sales happening all the time now in the city of Toronto.

Supply, especially again in the downtown core, supply is really dwindling of available land. This is something developers talk about with me all the time is when they look at the downtown core and map out all the properties and potential properties that they could purchase, the pickings are very, very slim so to speak, and even the sites that you are buying today, they’re much more complicated, and they’re much more expensive sites to build on than sites that you were buying even just 3 years ago where 3 years ago, you could still be purchasing some of these surface parking lots or little buildings that you can just easily knock down.

Now, you’re getting into much more complicated sites, heritage properties, not square sites anymore like L-shapes, and S-shapes, and all kinds of interesting configurations. They’re having to become much more creative. You’ve got builders … 488 University. They’re building a condominium building on top of an existing commercial office building, something that has rarely been done, but now is being done and is the way that the market has gone, so gone are all these surface parking lots where if you look at photos of the Downtown Toronto from … [interesting 00:05:15]. Look at these photos. You’d see Downtown Toronto in the ‘70s and ’80s, and you’d see these massive, massive football field size parking lots all over the place right in the downtown core, particularly around the CN Tower and around Spadina in that area there. Just these massive sprawling parking lots with a thousand cars in them

Those days are all gone. Those parking lots are all gone. Again, if you do happen to find a parking lot that’s easy to build on, you’re likely looking again at a 9-figure price for that type of real estate in a lot of cases, so that’s number one, land prices, and so as the land prices just continue to shoot up inevitably, the … that’s the raw material that. That goes into building this thing we call “condos,” and so as the raw material costs are going up, the end price is going up as well. We’ve seen dramatic increase in land, we see dramatic … which will translate into dramatic increase in condo price.

Number two is house prices. The second factor why I do believe that we’re going to see condo prices shoot up in the next few years is just take a look at house prices. Something we talk about in this podcast a lot is the interconnectivity between the housing and the condo market. A lot of people make the mistake of seeing them as 2 totally separate markets, saying that they don’t have an effect on each other, but that’s totally wrong thinking. Essentially, they are all part of one overall market. You need to look at both. You need to understand what’s happening in both to be a prudent investor.

As you look at, again, house prices in the city of Toronto, everyone knows that they have been increasing at very dramatic rates over the last several years and averaging about 10% year over year increase in average pricing for low-rise housing in Toronto for at least the last 5, 6, 7 years coming out of … since coming out of the recession.

Effectively, that means that resell prices have pretty much doubled. If you own a house in the city of Toronto or really anywhere in the GTA, most likely, it has probably doubled in value in the last 7 years. If you’re in a prime, prime area, it’s probably doubled in value in the last 5 years, so that … Again, as the … When you look at the condo market, condo prices have been increasing at a much lower rate, so the gap between the two is growing, and growing, and growing. Inevitably, the pendulum is going to swing back, and the condo prices will be pulled up. There’s upward pressure on those condo prices because of that.

Another way to look at it is look at … do some shopping around. Just hop on realtor.ca and just start looking around at what … how much a new home, a brand new home in a good area in the city of Toronto is going to … and you might be shocked at what you get for the price. If you actually start doing the math on it, and I have certainly have done it myself, you start seeing properties in good areas, brand new homes in good areas, they’re running you in some cases as close to around $1,000 per square foot, $1,000 per square foot for a low-rise house. Again, these are numbers that for low-rise housing, we … on unprecedented territory here, but again, you look … let’s say a couple quick examples.

Let’s say nice neighborhood like Leaside. You want to get a brand new house on say a 35, 40-foot lot. It’s going to be around 3,000 square feet. That’s going to run you about 3,000,000 bucks at least, so you’re looking to get around a thousand … 3,000,000 bucks, 3,000 square feet, around $1,000 a square foot. Let’s say you want to be more into the city itself. Let’s say you go into a neighborhood like … let’s say the beaches, and you’re getting into smaller lots. You’re getting into semi-detached product in a lot of cases. Let’s say you could find a brand new house in there. It’s going to be around … It’s going to be small house, small lot. Something around 1,000 square feet. For a small city house, it’s going to run you around $1,000,000. Again, 1,000 square feet, $1,000,000. Again, you’re looking at around $1,000 per square foot.

Compare that to what you can get in the condo market. In the condo market, you can get something brand new or very close to brand new in a great, great prime downtown location, walk to work, the city life, everything else, great views for around $700 per square foot. You can get a prime, prime piece of real estate downtown in the condo market brand new for around $700 a square foot, which to me is … and to I think a lot of people is really starting to look like a bargain.

When you’re talking about … People are paying $200,000, $300,000, $400,000 over asking price in bidding wars for houses. The amount that you’re paying over the asking price, you can go and buy a nice little 1-bedroom and den condo just for the overage that you’re paying in some of these bidding wars. There’s so many different ways to look at it, but the bottom line again here is that house prices have just shot up so much while at the same time, condo prices have remained comparatively, relatively flat. They are still going up, but not as much, and so again, the condo market is looking better and better.

Especially when you talk about the larger 2-bedrooms. Again, the house alternative type properties. A lot of first-time buyers are just going to be shut out of the housing market completely, especially if the pricing trends continue. It goes up another 10% this year, another 10% the following year. It’s just going to reach a breaking point where first-time buyers are just completely shut out of the housing market.

We’re already starting to see that now, and so they’re going to be saying, “You know what? Forget it. I’m not even going to look at a house. I’m going to look at a condo, and I want something a little bit larger, a 2-bedroom that I can live in for a long period of time, that I could start to raise a young family in.” Again, as investors, I think it’s really time to start looking at the 2-bedroom product, particularly the larger 2-bedroom product, 800 square feet and up. I think there’s going to be a very nice appreciation in that type of product over the next few years in particular.

Okay. Number two, that was house prices. Number three reason why I do believe that prices are going to jump up in the condo market in the next few years is rental and resell prices. Again, we talk a lot on this podcast and with my clients. We’re primarily investors in the pre-construction condo market because that’s where we can get the most bang for our buck, that’s where we’re going to make the best ROI, and that’s where we want to be with this particular product type, that being condos, for a number of reasons.

We won’t get into them all right now, but on the … When you look at the resell market, what’s happening in the resell market, prices are increasing a lot. They’re increasing at a faster and faster rate, and so whereas 2 years ago, we’re seeing prices pretty flat. Maybe up 1%, 2%, maybe 3% would be a good month, and then last … In the past year, you saw prices going up a little bit more year over year, looking more like 4%, 5%, 6% as what we saw a lot in 2015.

Now, the latest numbers for 2016, the first month of the year being January, the latest numbers from Toronto Real Estate Board shows that condos are up 8.6%, 8.6% in January. Again, if you’re talking about, “Could condo prices rise 30% in the next 3 years?” if you take 8.6% and you multiply it by 3, you’re coming very close to that 30% prediction right there already, right here in January, looking at the numbers today, and so we’re not that far off of it already becoming a reality today if this pace keeps up.

If you look on the rental side of the market, again, we talk a lot about rentals in the podcast, very important as condo investors. We want to know what’s happening in the rental market. Rentals are up in price around 3% to 4%. Rental prices are up around 3% to 4%. We’re also seeing … and this is despite the fact that a record number of new condos are being completed. We’re still seeing prices continue to go up, so supply is up dramatically, yet prices continue to rise.

If you look at the number of condos that have been rented out, the rental market has doubled. As we talked about on previous episodes, the rental market has doubled in the last 5 years approximately. There’s twice as many condos that are being rented out as there were about 5 years ago. Again, we’re seeing dramatic, dramatic growth in the condo market overall. What that really translates into is, of course, people want to live in condos and market is robust, but it translates into a growing city. It means It’s evidence of a growing city.

The city is growing dramatically, particularly again the downtown core, and so when you have a growing market like that and you have prices that are going up for sale, also for rent, again, all signs are pointing to … that this market is on the move, that prices will not be sitting at these low-appreciation rates for much longer. I do believe we’re going to see a big pop in the condo market over the next few years, so that is number three, rental and resell prices.

Number four point is taxes and charges from the city. Again, take a look at the show notes for this episode over at truecondos.com/podcast. You can see a link to the video for the interview with Brad Lamb. Again, he’s making a point there that not only have land prices gone up 500% the last 10 years, but development charges, and taxes, and fees, and things that are charged by the city to the developers for every new home, new condo that they build, they have doubled in the last 2 years alone, and he made a point that, for example, on a 1-bedroom condo, they’ve gone up from 10 years ago, these charges were zero, and now, they’re about $20,000 for a 1-bedroom condo.

All these charges are actually significantly even higher in the 905 regions surrounding the city though. These development charges are much, much higher than that, and so all these things are just inflationary forces in the condo market that are going to continue to increase prices. We need to keep building more condos. We have a growing city, so we’re not going to stop building them. As we build more, these taxes keep going up. Inevitably, it will be built into the prices, and the prices will continue to go up accordingly, so that is number four.

Number five, the last factor is quite simply looking back to the beginning, and that is the reason why I believe that prices are going to go up 30% is because some very smart developers said they will. Before you laugh that off and say, “Oh, this guy is really toting or tooting the industry horn here.” What I mean by that is that condo developers, particularly large ones like Mr. Fenton at Lanterra, like Brad Lamb … to a lesser degree, Brad Lamb, but certainly, Mr. Fenton. These guys who are building thousands and thousands of condos who’ve got decades of experience in the business as developers, they think very differently than you and I as consumers or even as condo investors.

Whereas we’re on the ground, we’re thinking about today. We’re thinking about, “How much does a condo cost right now, and can I afford it? What kind of yield is it going to give me today?” this sort of thing. They are thinking 3 to 5 years ahead all the time. They are out there purchasing land, raw materials that will be turned into condos in 3 to 5 years, so they’re constantly … They’re thinking things through always in 3 to 5-year cycles where they’re taking something and turning it into something else, and it’s not until they complete that process do they get paid. They make money as developers not until the buildings are completed. That’s their finish line and whenever you complete a building, so they’re constantly thinking in 3 and 5-year cycles out.

The comments that these guys are making today are based on all that experience and that way of thinking to say, “What’s happening today will affect how things will be tomorrow, so what actions I’m taking today, and the results that are going to … what it’s going to look like 3 to 5 years from now.” If you have these very smart developers like Mr. Fenton, Lanterra, like Brad Lamb, and others saying this, you really, really got to stop I think, and take note of that, and understand why they might be saying that.

I can tell you again from having conversations with many other developers every single week, being in this industry for a long time myself, having a lot of great relationships with top developers, this is … everyone is starting to say the same tune. Everyone is really seeing the writing on the wall for condo prices, the fact that we are going to see much, much higher condo prices in the very near future. Some might not be as aggressive as the prediction as this one here that we’re talking about today, the 30%. Some might be a little bit less than that. Some might be a little bit more, but everyone definitely agrees that prices are not going down. Prices will continue to go up.

All that to say, all that, to summarize that, the opportunity again. Again, we harp on this all the time. The opportunity is now like I really believe that today is a fantastic, fantastic opportunity. There still are fantastic opportunities to invest in the market. You can still get fantastic, great quality product in great locations. For even as low as $600 a square foot, you can get something really, really solid investment that’s going to do very, very well over the next few years I believe.

If you’re interested, of course, in learning more about that and what options are available to you today, you want to go ahead, and reach out, and contact me. You can always get me at andrew@truecondos.com. You can go to truecondos.com anytime and check out more podcasts like this, and articles, and videos, and lots of great resources to learn more about condo investing in Toronto. You can reach me directly at 416-371-2333.

I want to thank you very much again for listening to this episode, taking the time out of your day. Whether you’re on the road, whether you’re in the subway, whether you’re at the gym, thank you very much for lending me your ears for these 20 minutes or so. Hope you found that podcast useful. If you did, won’t you go ahead and share this episode with somebody who you think could benefit from it? I will talk to you next week. Have a great week. Bye for now.

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