What If Covid Never Happened?

Andrew la Fleur: What if COVID never happened, what would the condo market look like this year in 2020? Let's talk about that on today's episode.

Speaker 1: 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 there. Welcome back to the show. Thanks for tuning in. As always your host here, Andrew la Fleur from True Condos coming at you since 2014 on this podcast, approaching 300,000 downloads of this. So thank you very much for your support over the years. And love to hear from you. As always if you want to get ahold of me, (416) 371-2333, or you can email me andrew@truecondos.com.

Andrew la Fleur: Now today's episode we want to again, address the listeners out there. Maybe this is you who are worried, panicked, concerned to varying degrees of what's going on in the condo market right now. Obviously, if you have investments downtown Toronto, in particular in your pipeline, pre-construction stuff coming up, or if you have existing units right now that you've been renting out or you need to rent out, then naturally you're going to be quite concerned about what's happening in the market right now. The overall story of course continues to be in 2020 for the downtown condo market in particular, that rents are falling. And now we're starting to see prices are falling a little bit as well.

Andrew la Fleur: So how bad is it out there? First of all, let's start with that. We just got the numbers for the October numbers for the Toronto Real Estate Board. So hot off the presses, the latest numbers. So I'm looking through them I don't see anything particularly jumping off the page as being new. For those of you who've been following the market closely, along with me. Sales to listing ratio again, this is my most number one stat that I look at. It's just another way of expressing the months of inventory, by the way. So you're looking at how many sales are occurring in a given month versus how many available listings, how many properties there are available for sale. This is the supply and demand equation.

Andrew la Fleur: I like to look at it as the sales to listing ratio personally, some people like to talk about in terms of months of inventory, but for me, I don't know why I just, I like that simple percentage number. That's just how I've always looked at it. And that tells me I can right away tell you what's going on in a market if you just tell me the sales to listing. So looking at that, we're at 19%, just under 18.8 or something like that percent for the month of October. So that is under 20% is officially by definition, by most people, the way they define these things, that's officially a buyer's market when you're under 20%, that is officially a market where you would expect prices to be going down, not up because there's just too many units available and not enough buyers.

Andrew la Fleur: So results in if you look historically at the market over the last 15, 20 years, anytime it's below 20%, you're probably seeing prices coming down. Now, prices can come down or go up, not necessarily following along the rules of these percentages, but if you're talking to people on the street, looking at what's happening in the market, looking at number of showings and activity on listings downtown, yes, we are certainly in a buyer market if you want to call it that with the resale condo market downtown, prices are coming down.

Andrew la Fleur: Are they coming down massively? No. They're coming down sort of slowly. How much are price is down? Well, depends how you look at. I mean, year over year prices are down. If you look at prices from this time this year to this time last year, prices are down only very marginally. If you look at where prices are today versus where they were before COVID, right before COVID call it around end of February, first few days of March before COVID changed the whole world prices are down probably around 10% or so on average, which is a lot obviously, but that doesn't take into account seasonality. And it's not necessarily to say prices are down 10%, but prices are down and they're trending down. However, prices are not, they're not dropping like a stone or anything like that. We're not seeing massive drops in prices or anything like that.

Andrew la Fleur: Again, the sales to listing ratio 19%, it's not great, but it's not terrible either. We have seen this number before in recent years. Again, if you've been looking at sort of 2011 to 2015, roughly a three, four-year period there where condo prices downtown were pretty flat, where the sales to listing ratio was usually between 20 and 30% all the time for a number of years. And there we saw prices sort of mostly flat, some areas were up one or two, three percent, some areas were down one, two, three percent. So we're not too far off that sort of range.

Andrew la Fleur: If the sales to listing ratio were to go down to say 10%, representing that would be 10 months of inventory. Right now, we're at about five months of inventory. So if it were to go down and say 10%, then that would be a different situation. Only a few percentage points, but then you would really see prices moving down. But on the flip side, if it were to go up just a little bit to say 25, 26%, which is not that many percentage points, we would actually see prices stabilizing. You might even see prices going up slightly at that kind of a number, not huge, but you might see prices go up very slightly 1%, 2% kind of thing.

Andrew la Fleur: So if you look at the number of sales as well, 512 sales happened downtown in the month of October, certainly well off the numbers that we saw in the months of October. In the month of October, the last few years where the condo market has been very hot, 2016, '17, '18, '19 downtown condo market has been very hot in those years. It's lower than we saw in those past few years. But it's not, again, it's not terrible. It is encouraging to see despite the doom and gloom, despite the massive changes that have happened in our world and in our city, the sales number is encouraging to me. It's nice to see that people are still buying downtown condos. It's absolutely the case. It is happening. Product is moving out there in the marketplace. Is not a case of where we were in sort of April where everything, the world just kind of froze and the downtown condo market froze and there was like virtually almost no sales happening.

Andrew la Fleur: It's not the case. People are buying. Buyers are out there shopping. The biggest thing again, continues to be, it's not the number of sales, which is pretty decent. I haven't cracked the number, but just looking at the surface, it's probably at, or slightly above sort of the 10-year average of sales for this time of year downtown. So it's not like we're, that's pretty encouraging. It's down from the heights of the last few years, but it's probably up from again, the 2011 to 2015 era. It's probably up from that.

Andrew la Fleur: So it's not the sales, the sales are pretty good. They're happening. It's the supply. Story continues to be the supply and the supply continues to grow. The amount of inventory in the market continues to grow. It went a little bit higher yet, still over 2,700 units active listings downtown in October, which is just, it's exponentially higher than it was this time of year, last year, the past few years. Right? So that continues to be the story. And again, the factors contributing to this massive increase in supply. There's many pieces to the puzzle, but they're all related to COVID and the situation with COVID.

Andrew la Fleur: So wanted to do in this episode, just a quick little thinking exercise got me thinking, what if COVID never happened? What might the condo market look like right now, in this year, if COVID never happened? So if COVID never happened, what would be different? Well, what would be different. Immigration would certainly be a lot higher, right? There'd be a lot more people coming into Canada. That is pretty much, that's exponentially lower than it was and was planned to be. International students. International students I think there's something like 100,000 international students in the GTA at the various universities and colleges around the Greater Toronto Area. They are obviously a massively important piece of the rental market. We're not specifically talking about the rental market, but rentals are dramatically affected as well this year, because of everything that's happening.

Andrew la Fleur: What if COVID didn't happen? Unemployment rate. Unemployment rate would not be as high as it is right now. There'd be a lot more people working and a lot more economic activity as there was before COVID. Presumably the economy until COVID hit was trending up, unemployment was trending down. Toronto's economy was booming by all accounts. So the number of rentals that were happening would likely be higher. Interest rates. Interest rates would probably be higher as well. So interest rates came down. That's been a good thing for condo investors and for our cashflow. Interest rates have come down around 1% or 1.2, 1.3% from before COVID till now. So interest rates would be higher.

Andrew la Fleur: The demand for low-rise housing has been of course, off the charts. And it's definitely the tale of two cities where condo demand is down and house demand is up. There's definitely, and I call it the COVID elevator discount. So any type of housing I.e condos with an elevator, if you have to go in an elevator in a hallway, people don't want that right now. If you have a house with a front... People want a house with a front yard and a garage, a backyard that kind of typical low-rise white picket fence. That type of housing, obviously the demand has skyrocketed for and the numbers are off the charts. So people are, you could certainly argue and I've been saying, they're irrationally in love with low-rise housing. And they're irrationally falling out of love with condos. And as a result here we are.

Andrew la Fleur: What would still be the same? You'd still, as I said, at the beginning of this year in a podcast, you can go back and check. There was always a lot of new condos expected to be finishing this year, completing this year and coming into the condo supply side of the equation. Apologies, by the way, if the audio on today's episode sounds a little wonky. If you're hearing some humming noises, whatnot in the background, this is the COVID world of working from home and the neighbors doing some leaf blowing. And I got my cleaning lady is here doing some vacuuming and whatnot. So this is a great example of the COVID world. What if COVID didn't happen? Well, the audio on this podcast would be a lot better. So, but yeah, anyways, I'm sure you can still hear my voice okay.

Andrew la Fleur: So condo supply would be still, this was going to be a year for more condo supply with just the schedule of new condos coming for completion in 2020. We knew that was going to be quite a bit this year and expected to be quite a bit again next year before perhaps tapering off in 2022 is roughly what we're looking at. But that thing of course, can always change. What else would still be the same? Airbnb, so the city of Toronto squashed Airbnb for condo investors pretty much. So you can't really do that anymore. So Airbnb, without tourism, that's been a huge factor in the condo market with COVID no tourism, no demand for Airbnb. So everybody who's Airbnb in their condos, stopped doing that, but essentially most of them and they're starting and they tried to put them on the long-term rental market or sell them. So that's been a huge factor in supply. That probably would pretty much still be the case if COVID never happened. So you'd have that.

Andrew la Fleur: So you look at all these factors, you add it all up. What would the condo market look like? Well, in my estimation, basically it would go from a buyer's market right now, which it is a buyer market right now, both for buying and for renting. What would be different? Well, on the for sale side of the equation, it would be a seller's market. You wouldn't see this massive imbalance of supply and demand. Even if you're looking at the supply side supply would go up. Yes. Even if you just kept the number of sales the same, but if you said, if you increase supply by 30, 40%, which would be a major increase in supply, historically speaking year over year, to see a 30, 40% increase in supply side of it, even if you did that, you'd still be in a seller's market. You would still be seeing rising prices just from that alone. You probably see a little bit more sales actually happening of condos and a little bit fewer sales of houses.

Andrew la Fleur: Some of that demand on the housing side would shift back to the condo side. So all things considered on the resale condo market downtown, you would probably see a seller's market. Not a strong seller's market, but call it a light seller's market or kind of in between a "balanced market" and a seller's market, kind of riding that line there. You might see sales to listing ratio 40 to 50% kind of range, as opposed to right now, again, just under 20%. Strong seller's market would be kind of 60% and higher, right. A balanced market in the 40s, so be doing that 40 to 50% kind of range if COVID never happened by my anecdotal sort of estimations here on this exercise we're doing.

Andrew la Fleur: On the tenant side of things, it would be a tenant's market still. Rents would probably still be coming down this year as I said, at the beginning of this year in a podcast. So rents, I would think would be flat or maybe down zero to 5% versus rents now downtown are off about 15% on average. In some cases, some buildings, some units are down like 20%, 25% in some cases. So if COVID never happened, I think rents would still be down, but probably only down like zero to 5% or so.

Andrew la Fleur: So who cares? This is all, what does this mean? Why am I doing this? Well, I'm just really doing this as a thought exercise for condo investors out there to, again, encourage you and to help you think through the situation to not get too freaked out or panicked or worried about what's happening. Because if COVID never happened, the condo market would have been in very good shape overall. Things would have been very, very different if COVID never happened.

Andrew la Fleur: And all this to say that COVID will not be forever. COVID will go away. The world will return to normal. Hopefully in 2021, we will see a return to normal. It's not going to happen overnight, but it will happen, I think, quicker than most people realize. And certainly I think, nine out of 10 people would probably agree with me that by 2022, which is just a year and a couple months away, it's not a long time in the grand scheme of things by 2022, we will very likely knock on wood, be back to a normal pre-COVID world kind of a thing with respect to our real estate markets and our economy.

Andrew la Fleur: So all this to say that this COVID situation that we're in, that has caused such upheaval in the real estate markets. It's a short-term thing. We as condo investors need to look at the big picture. Again, one or two years out of a 25-year real estate building portfolio is not a big deal. There are always going to be ups and downs. There are always going to be things that we encounter as investors that we cannot control that are much bigger than anything that's within anybody's purview or crystal ball, to be able to predict. This is just part of it.

Andrew la Fleur: The fundamentals of our markets still have not changed. And as long as the fundamentals remain as they are, then investing in the downtown condo market in particular will always be a long-term great proposition for you for the longterm. And you'll always do well with it. If you, again, maintain that long-term perspective. If you fall into the trap, which some investors are falling into now, just thinking short-term, thinking about what's happening immediately right now, and not looking beyond this, then you may be tempted to sell, and it's again, just a horrible time to sell or to get out of the market. You're going to be selling at a dramatic discount from what your asset is truly worth. So my advice continues to be, to ride this out, continue to make smart decisions and build for the future and always think long-term.

Andrew la Fleur: There you go. I hope you got something useful out of this episode. Hopefully it was an interesting and thought-provoking exercise to ask yourself and ask the question of what if COVID never happened. And there you go. Until the next time, I hope you have a great week and happy investing, we'll talk soon.

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