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How Did The Condo Market Get So Hot And How Long Will It Last?

How Did The Condo Market Get So Hot And How Long Will It Last?

The Toronto condo market is on fire so far in 2016. All of the resale, pre-construction, and rental markets are surging. How long will this keep up and what can condo investors expect in this market moving forward? Andrew la Fleur talks about all this and more as he breaks down the latest statistics on the market from the Toronto Real Estate Board.

Click Here for Episode Transcript

Andrew la Fleur: Well we now have the results from May 2016 from the Trona Real Estate board, and it turns out that condo sales are up a staggering twenty two percent, and condo prices are up a healthy six percent. Talk about what these numbers mean and more 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, I appreciate your time and taking the moment out of your day to hear what I have to say about the condominium market. I really appreciate all of your reviews and feedback on the show, it’s very helpful and it’s great for getting the word out about the show.

 

Again, today I want to talk about the May 2016 numbers from the Toronto Real Estate board, the big headline here is that once again as has been the story with pretty much every month so far this year in 2016, condo sales are way up, way up. There’s double digits and then there’s major double digits, we are into major double digits with twenty two percent increase in sales over May of last year. The good news is that the prices are going up at a healthy rate, I would say, they’re not going up at a crazy rate, like we’re seeing in the low rise market which is clearly unsustainable, we’re seeing much healthier rates of increases which is what we like to see, up around six percent on average for the GTA for the month of May. Nice healthy numbers, six to eight percent is what we’ve been seeing, the average numbers for the 416 area for condos this year is about eight and a half percent, average for the 905 region seems to be around five and a half, six percent range, a little bit less than Toronto. Those are very healthy numbers that we like to see as condominium investors.

 

As I mentioned sales have been up on average around twenty percent every single month so far this year, this month’s even a little bit more than that around twenty two percent. The market is hot, make no mistake, it’s not just the low rise housing market where we’re seeing bidding wars, where we’re seeing signs of major shortages, in product, in supply, in the supply side of the equation we are seeing the same thing in the condominium market.

 

Surprising a lot of people, obviously if you listen to this podcast, if you’re receiving my emails, if you’re tracking what’s happening in the market, if you’re an active investor, you’re probably not surprised because we’ve been talking about this and calling for this for quite some time. Those sort of on the outside, the people you might talk to around the water cooler at the cocktail party, or at the soccer game, probably be very surprised to hear these numbers coming out of the condominium market. There’s still this real perception out there that there’s too many condos, that we’re building too many condos, that there’s cranes everywhere, there’s condos are going up everywhere, it’s condo city, what’s going on with the market, this kind of thought, this kind of perception. Again, as we talk about time and time again over the last two years in this podcast, we do not have a condo oversupply situation in Toronto. We definitely are in an under supply situation, we definitely have a shortage of condominiums and of housing in general in this city. It’s just clearly evidenced by the fact that prices and rents continue to rise.

 

What I think is going to happen, and really what I think is most interesting and most relevant for you, the listener, the investor, the potential investor in condos, is that, you know, if we continue to have these months of twenty, twenty five percent increases in sales, it’s just going to continue to create a further and further shortage of product situation, and prices will rise more and more. This is a pattern that we see in housing market, and any market really, first the sales increase and then the prices lag behind a little bit and the prices will increase more later. Prices are increasing now at a certain rate, but I believe that later on especially in the last half of this year we will see even greater price increases. Be aware of that, prepare for that, plan for that, be strategic about your investing with that in mind.

 

It’s interesting that last year, 2015 was really supposed to be the year of the condo glut, they year where, you know, the supposed house of cards that the real estate bears were telling us about for years, this was like the big year when a massive number, a record number of condos would be coming for completion, a record number of new product being added to the supply side of the equation. This would surely mark the end of this long ball run, and this would surely just cause prices and rents to just drop significantly as, you know, buyers and tenants would just have their pick of dozens of units, and they could just negotiate and bargain down sellers to whatever numbers they want. Again, this did not happen, it has not happened, it will not happen any time soon. 2015 was the record year, we did have a record number of condo completions, but again, what happened, prices still continued to rise, not as much as they are rising today, but they did still continue to rise, and rents still did continue to rise, through that challenging year of 2015.

 

The market was challenged, the strength of the market was shook, but the market stood up, and the market stayed strong, and the market just continued to plow forward. What’s interesting is, I just saw a stat come across my twitter from Ben Myers, and if you’re not following Ben Myers on twitter and also put a plug in for myself too, but if you’re not following myself, Ben Myers, others, Urbanation, there’s so many great people to follow on twitter, definitely get on twitter and it’s a great way to track the market and see what’s happening in the market. If for nothing else, if you never even got a twitter account by now I don’t know what you’ve been up to, but if you still don’t have one then just get on it just for the real estate stats and info alone, it’s great.

 

Sidetrack, but anyways, back on track here talking about the fact that on Ben’s twitter feed this week, he had a great stat there, can’t remember the source but it was basically saying how condo completions for 2016 versus 2015 were down … We are down about twenty four percent, twenty four percent below we’re tracking from 2015 numbers. If prices went up and rents went up in 2015, and now in 2016 the number of new supply being added to the market is significantly down, down about twenty four percent, what do you think is going to happen in 2016? Well, obviously prices and rents will rise even more, and that’s what we have been seeing and that’s what we will continue to see, I think it’s going to accelerate as we head into the second half of 2016, so definitely be aware of that, prepare for that. You heard it here first! Just be a smart investor in the market.

 

What else are we seeing in terms of stats this year? Rental prices, Urbanation put out their Q1 rental report of course, they’re great reports that Urbanation puts out, and rental prices are up across the board for the GDA on a per square foot basis, so this is true, real, accurate measure of the market, it’s not just on a end price basis because we don’t want to just track end price spaces when it comes to rents, or sales really because the issue that we’ve been talking about for years is that condominiums are constantly getting smaller and smaller. The average size of a new condo is much smaller than the average size of an existing condo. If you’re tracking things on a per square foot basis, it’s a much more accurate picture of the market as opposed to just on an end price, absolute price basis.

 

Another sidetrack there, but getting back to it basically what I’m saying is, rental prices in Q1 for 2016 are up six point eight percent on a per square foot basis. Six point eight percent increase in rents is a lot, that’s a very big number. Again, it’s great to see as a condominium investor, and you know, I love it when I see a number like that, it makes me look at all my rents across the board, all my properties and say, you know, where can I tweak things a bit, where can I maximize my revenues, am I undercharging tenants here or there, we need to constantly be evaluating that as investors.

 

A couple of interesting anecdotal points, as a sort of side here on this podcast, we’re seeing bidding wars in buildings where … For rentals, we’re seeing bidding wars in buildings for rentals, where a year ago, six months ago you couldn’t give a unit away. I mean, you would have units sitting on the market for a month, you’d have one showing in a month, and now we’re having bidding wars in the same building today, and properties going for over the asking price, these are on rentals, we’re talking about rentals here.

 

One example I just heard about anecdotally this week from a colleague is Westlake, Westlake project out in [to-bo-co:10:32], it’s actually a good example, maybe a bit of a case study as well, of what happens in new buildings, so here’s a little teaching moment for all investors out there. When a new building finishes it’s very common that the market is hit with a lot of units at the same time for rent, and so obviously that will put some downward pressure on rental prices in that building. This is again why it’s very important as investors to be patients and to not look to sell or get out of a condominium investment too soon. Timing is everything and you really need to understand the ebbs and flows of the market.

 

Like I said Westlake is perhaps a good example where you have a lot … You know, several buildings, a multi power project, in one, so hundreds and hundreds of units in a concentrated location. When six months or a year ago, like I said, it was extremely difficult to rent units in that project because the supply was … Just the supply was so large, and now today you’re seeing bidding wars in that building for rent. Incidentally that building does have a grocery store in it, so that is certainly, again, we’ve seen that time and time again, where having a grocery store in your building makes such a big impact on the rental and resale rates. Here’s a little plug there for Minto Westside which will have a grocery store in the building, and still has some great units available if you’re looking at investing in the downtown right now it’s a great project to still get into.

 

Okay, today’s episode is just full of tangents, I’m going all over the place with this, but hopefully you’re enjoying it, hopefully you’re tracking along with me and you’re learning something about what’s happening in the market.

 

Another anecdotal thing personally, personal experience here right from the horses mouth, I am in the process of moving, I am not selling my current house I am keeping it as a rental property and moving into a new house, which is exciting but also stressful and fun and everything else at the same time, as you know if you’ve ever moved before, which I’m sure everyone listening has. I’m in the process of just renting out my house, I’ve actually just secured the tenant, again, my experience on the rental side, not in an area here where there’s traditionally a lot of rentals, the supply is extremely low, demand is also probably quite low, it’s also an area where the vast majority of people own their homes, there’s not a huge rental … Not a lot of houses for rent. I wasn’t really sure how the process would go, but ended up renting out my house in one day, first person who saw it rented it, and we ended up getting hundreds of dollars above any previous comparable or recent property in the area on a per month basis.

 

Yeah, again, the rental market is hot, definitely very hot, there’ll be another anecdotal story about … One of my tenants is moving out of one of my units that I have in Regent Park, as you know I’m a big proponent of Regent Park and the revitalization that’s happening there. I’ve bought several units there over the years, and one of my studios there a tenant is moving out, so I was looking as you do when it’s time to put a property in the market, you do your analysis and you see what are the going rents in the area, and much to my surprise and delight the prices for studios have gone up in that building about one hundred dollars a month just over the past year. A year ago the studios were averaging around twelve hundred a month and now today they’re averaging around thirteen hundred a month. The last couple that have gone, have actually gone over thirteen hundred around thirteen fifty a month. Amazing to see that, great news again to be able to increase your rents like that, when an old tenant moves out and a new tenant moves in, that’s good news and puts a smile on any investors face when you see that.

 

Rental market is hot, condo market is hot, things are moving along we have some very great stats there. Let’s talk about implications, lessons for condominium investors. Again make no mistake, a big story is that housing prices are driving condominium prices, what I mean by that is that as house prices continue to just get further and further out of reach for just about anybody it’s pushing more buyers into the condo market, that is a big force, it’s a big upward pull force on the condo market, is the exponential growth of prices on the low rise side is driving people to the condo market, and that’s a good thing for condominium investors, it’s certainly going to be pulling prices up for the foreseeable future.

 

Oversupply, do we have an oversupply of condos? Let’s put that one to bed once and for all hopefully, and just stop talking about this oversupply nonsense in the condo market, we don’t have a oversupply we have an under supply of condos. If you own a condo and you’re thinking about selling a condo in the GTA, my general advice, of course it’s always going to be different for everyone’s situation, but if you don’t need to sell for economic reasons my advice is do not sell right now, it is not a good time to sell because you’re going to be missing out on a lot of growth over the next year. Selling right now, unless you’re reinvesting that money into another property, it’s not a good time to cash out of the market, certainly you’re going to be seeing a lot more growth in condo prices over the next year. If you’ve got a condo, maybe your tenants moved out, or maybe you’re sitting on it, or thinking about buying a boat or something, I don’t know what it might be, but my advice is keep that condo at least for the next year you’re going to see a lot more gains in prices and rents over the next year, so just hold on.

 

Another thing is, just a lesson for investors is, the condo market moves in waves, [inaudible 00:17:45] talk about this sometimes but, it goes through … The condo market moves in cycles, it moves in waves ups and downs, so there’s these periods of overbuilding and underbuilding, overbuilding and underbuilding, overbuilding underbuilding, and it just goes like that every few years, it’s just the nature the beast, it’s the nature of a commodity like condominiums where the market is under supplied and developers rush in and say, ‘Wow, here’s an opportunity, prices are rising, let’s get the product into the market, and the prices are rising.’ Everyone does that, and there’s too much supply on the market and things will slow down and we have these waves of overbuilding and underbuilding. Right now we’re definitely in the middle of and underbuilding sort of a scenario, which we also saw, the most recent one was probably 2011, so 2016 so far is really reminiscent of 2011, and 2011 was really reminiscent of 2007, and so they seem to go in these four to five year cycles of overbuilding and underbuilding, so …

 

All that to say, get ready for larger, bigger price increases in the condominium resale as well as the new condominium market, pre-construction market, in the fall of 2016 I’m expecting to see big price increases, even bigger than we’ve seen so far this early 2016. Fall 2016 and early 2017 I’m expecting larger increases than we have been seeing so far and even hotter condo market, and then as I said these things do go in waves, I do expect that there will be a slowing down, not that prices will fall but just that the rate of increase in prices will begin to once again taper off, probably somewhere around the middle of 2017.

 

Well, there you go, those are my thoughts on the market today as we stand in early June of 2016. I hope you enjoyed that episode, I went on a lot of crazy tangents there, but I hope you got some good factoids and learning points about condominium investing and about what’s happening in the market right now. Fuel for your next backyard barbecue, cocktail party or water cooler conversation around real estate.

 

Thank you very much again for supporting this show. If you have any questions you can always reach me at andrew@truecondos.com. If you’d like to invest in the condo market, or you’d like to learn more about it I’d love to talk to you, so please reach out to me and make sure you do visit truecondos.com for more great podcasts, articles, videos, and lots of great free information which is all created and designed for you the condominium investor.

 

Okay, thanks for listening, and have a great week.

 

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 Condos subscriber by visiting truecondos.com

 

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