Toronto Municipality: The Big Tax Loser with a Condo Bubble Burst

While the biggest losers in a Toronto condominium bubble collapse would be the owners of the property – there will be fallout to other stake holders (looking to the US for clear examples) including banks, federal insurance programs, and the condominium complexes (abandoned units which don’t pay their condominium fees).

But owners that decide to simply bunker down and hold on to their properties until they rise once again will face an additional burden for their trouble: higher taxes.

Toronto has a Municipal Land Transfer Tax (MLTT) – on top on the provincial land transfer tax – which accounts to about 300 million dollars a year. This tax takes place when a property changes ownership. For a cost example, on the average cost of a condo ($369,892 – Toronto Real Estate Board) the Toronto MLTT works out to $3074.52.

If property prices fall 20% the drop in city taxes isn’t the same because the rate varies based on the price of the property. This is important to realize when the cost of detached homes in Toronto averaged $650,147, and the blended value of all property types  in Toronto averaged $517,556 – a 20% reduction in property value would result in a 34% reduction in the MLTT – or about $105 million in reduced revenue for the city.

A collapsed bubble market coupled with a MLTT will result in even further loss in property values. It will be bad enough when values naturally drop in a bubble, but with Toronto scrambling to make up 100+ million in taxes, there will be dramatic raises in property tax (or other service costs) that will continue to put a downward pressure on housing values.

People who hold on to under-water equity homes will get punished for riding out the loss with new and greater taxes that were previously funded by an addiction to the MLTT.

I’m not a big fan of MLTT – I much prefer a fair market taxation rate (which is nice – more expensive properties pay more taxes) as a single, primary, tool of municipal taxation. The MLTT seems too variable, too addictive in certain markets, and especially too difficult to deal with when a municipality has to go cold turkey on a collapsed housing bubble.

Safe Deposit Boxes Sold As Condominiums

I have already blogged about the use of condominium designation for storage facilities (here, and here for super luxury) – so it seems a natural evolution to offer really really tiny storage. SafeBox Condominium Vaults (Parallax Investment Corporation is the developer) will be opening up the first (world wide) condoized safe deposit box facility in Toronto, with further development in most large cities across Canada.

On a square foot basis, the units go for either $2160/sq. foot (for 3” ceilings), or $3300/sq. foot for the luxury 8” ceilings.

I’m all thinking this is a phenomenal idea, until I checked out their website and see they are marketing the purchase as “the ability to own a prime piece of real estate at an affordable price.” This is not an investment opportunity, this is a different way to manage and secure valuables. That the company is even marketing 1.67 sq. foot condos as a real estate play is not only inexcusable, it makes that plan feel a little scammy to me. Now I’ve got a little of that “buyer beware feeling.”

More Fallout to Toronto’s Falling Glass: $20 Million Lawsuit

In 2010 and 2011 two recently built condominium – the Murano Towers (731 units) and Festival Tower (378 units) literally rained down glass on the ground below. 13 panes of glass balcony railing released and fell.

Since then the glass from all those balcony units (somewhere short of 1000 units) has been removed and the owners forbidden from utilizing the space.

Yesterday the owners launched a $20 million dollar class action lawsuit. That’s about $18,000 per unit – to cover loss of use and to have the issue fixed in a timely manner.

Boards Can Enforce Parking Restrictions Even After Years of Not Doing So

There’s a recent ruling by the Ontario Superior Court of Justice between Toronto Standard Condominium Corporation No. 1737, and Farrah Hakim and Jaffar Kayyali, regarding board enforcement of owner parking.

Jaffar and Farrah bought a unit – with titled parking – and proceeded to park, according to by-laws, an overheight vehicle there for 3 years before the board informed them they were in violation. The couple fought the board and demanded the right to continue to park their vehicle in their titled spot. After 3 years of dispute the court ruled that the couple’s claim was invalid and ruled in favour of the board.

It’s important to note – because this comes up ALL (all!) the time with boards I deal with – that the court ruled the board didn’t have to grandfather the vehicle because the board issued and started enforcing the overheight violation on all deliquent owners (there were 7 at that time in violation) in a fair manner.

Many owners often argue that there is a “timeliness” requirement to be caught in their bylaw infraction. That requirement doesn’t exist. A board needs not be omniscient, nor perfect, in their application of the bylaws. They do need to show fairness when enforcing them, and that the board enforces bylaw infractions as they become aware of them.  That’s about it.

So, if you’re an owner raging against a board claiming that they “ignored the situation for years” and that should invalidate any restrictions listed in the bylaws, you might not find that a convincing approach to gain favor from a judge.

Why Toronto Condo Prices Will Absolutely Totally Go Down in 2012

Because I say so. And I’m only being partially facetious.

The base creation of property value is supply and demand. As long as demand exists beyond supply then the value of condominiums will remain static or grow. But that’s only part of the story for Toronto.

In Toronto the super vast (some reports over 80%) of pre-construction condos are investor purchased. Investors, versus homeowners, are looking for fiscal return. Cash. Money. Income. The Jackpot. The Dream. Investors are looking for a growth in their financial portfolio.

As long as there are three factors in housing their investment is good: (1) demand over supply and (2) revenue exists between purchase and sale (3) the perception of “need” to buy now exists in the market.

Let’s look at point 1: Toronto is about to bring on more units in the next two years than ever before. It is unknown if there will be enough population growth (and demographic movement) to create demand for all those units. While condo prices in Toronto have “always risen”, we have never seen this much inventory come on line over 3 years.

Point 2: Rents in Toronto have topped out at the moment. While the costs of condos have continually grown, the ability to rent them at a reasonable percentage of purchase price (about 6.25% of value per year) has not kept up. Rent levels are well below this ratio. This means its great value for renters, but returns for investors don’t exist on rental income.

Point 3: Perception of “need to buy” – and this one is important. If buyers think the market is hot (whether this is the Toronto area in total, or just the building they are interested in) they will pay the bucks and pay them now. Buyers who see competition for their “perfect” home will often become irrational about the purchase price. Investors and sellers love that. But as people like me (and I’ve blogged several times about my worry about Toronto prices),the Globe and Mail, the Financial Post (indicating a 15% Toronto correction), banks, and economic reports all start talking about an economic slowdown in condo prices – then buyers start believing that. Not only do they start believing it, they start acting on it. They start thinking at they might just be able to wait, or another awesome condo may come on sale slightly cheaper. Perception slows the market. That’s why in part Real Estate Boards always issue the most positive statement about demand. They are in the business of supporting good housing valuations – meaning larger commissions to their agents.

So when I say Toronto housing prices will go down because I say so, it’s because I’m part of the group of people writing about the downturn in prices. The more people writing with this opinion, the more housing prices will stagnate and likely drop. And I think there are going to be a lot of people writing about a downturn.

And those people who believe foreign investors will save housing prices – as foreign investors believe that Toronto is reaching a peak, or just growing slowly, they will sell and move their investment to the US for better returns. After years and years of depressed housing prices, newspapers and pundits are starting to whisper “the long US housing burst may be bottoming”. If there’s one thing that a good investor knows – buy low and sell high. So even if there is still growth in Toronto – there’s likely bigger growth south of the border.

Toronto Condo Market – Boom, Bust – Banks Divided

Toronto. Again.

The question is – will the growth continue, even with 21,000 units coming on-board this year and the same scheduled for next. The Greater Toronto Region has about 5.2 million people in it, and a growth rate of about 0.4%. That would suggest about 21,000 new people (including births) – if we average it out to the 2.1 people/family, that’s about 10,000 new units required. So we have an oversupply of 11,000 units/year in just condos alone – not including low-density housing.

To this the Bank of Canada, in regards to Toronto, has indicated:

The supply of completed but unoccupied condominiums is elevated, which suggest a heightened risk of a correction in this market.

In July of this year, the RBC said:

We believe that the attractiveness of investing in condominiums will gradually diminish … [and the overall housing market will be] mainly flat in 2011 relative to 2010, with some wakness emerging next year.

If you’re pro about market growth (average unit cost in November was up 8% from last year), National Bank Financial analyst Stefane Marion indicates that the current inventory of Toronto units could sell in 19.3 months – well below market lows of up to 48 months historically. You can also see in that Montreal, a reasonable close major metropolitan, condominium construction is up 68% year over year. It is unclear if this is added competition or an additional indicator that growth continues in Canada – especially the eastern heart.

I still think it’s due for a correction – earlier reports this year indicated 70% of new condominiums are investor funded. With world markets still tumbling (down 2% yesterday in financial sectors) investors will start limiting their exposure to a housing bubble. This in itself will start the downward trend on cost.

 

Bad News – Toronto Has Become a Developer

I wrote an article about how the Collingswood NJ municipality decided to become a condominium developer and ended up holding the bag because the condominium market crashed. I restate that municipalities should never be residential condominium developers.

The role of a municipality is to direct the desired developments through zoning and legislation, and to leave the risk associated with the project with the developer (see recent crash in US housing to confirm risk exists).

Municipalities should never be in the business of risk. They should be in the business of service and infrastructure, not gambling – as in “gambling if the condo market will still be good in six years”.

Six years is the projected timeframe it will take to complete the – now largest residential planned condominium – development.  The project, which will be 20% city owned and 80% Tridel owned, is a 75 story development at York and Harbour, near the railway tracks.

Mayor Rob Ford said the new joint venture represents a creative way of solving the city’s financial problems. Cities don’t need creative – they need solid and sustainable. Rob’s brother, Doug Ford – who also is elected to council – sits as vice-chair of the Build Toronto, the city arm that is spearheading this initiative. He says the opportunity represents a cash windfall:

When there is that much profit sitting on the table, we wouldn’t be very prudent business managers if we turned our head on this opportunity

To add, the Build Toronto’s chief executive Lorne Braithwaite is quoted as saying:

The market is hot as a pistol and we are about to generate funds for the city and create a fantastic new development

So now we have “a creative response” that “represents a sure thing” that relies on a condominium market that in six years remains “hot as a pistol”

I haven’t heard such a combination of positive will and high risk since friends told me to buy RIM at $140/share just three years ago. Thankfully that sure thing in a hot as a pistol telecom market panned out. In only three years it’s lost 88% of its value. One can only hope it keeps performing as well for the next three years!

I didn’t buy any RIM, and I don’t buy into a municipality becoming a developer.

Follow Up To Post “Toronto Condo Sales Are Freaking Insane”

While the post was just two days ago, there have been two great articles that back up my concerns, and add a few more. For good reading (what I see) on the likelihood of a Toronto condominium bubble burst – check out the following:

Troubling Signs for Toronto’s Condo Market

Absorption Rates

While I do shout concern about a correction in Toronto, I don’t think it’s anywhere near Miami’s folloy, where prices dropped 50% from their peak. While Toronto shows the same investor levels for pre-construction purchase (70-80% in Toronto, and then in Miami) – Toronto has two things that would help mitigate some drop: it is a financial centre (financial center condos will always outperform the rest of the market), and it’s not a snowbird getaway – it’s a primary residence location.

The bigest take away from all these articles recently – $800+ psf is definitly already gone, and it looks like reasonable top end cost is about $700 at the moment, and a 20% reduction or bubble pop would put top costs at $560-$600 psf.

Toronto Condo Sales Are Freaking Insane – Still Think it is Speculation Driven

Toronto is Hot Hot Hot baby! The National Post is reporting – for only January through August 2011 – 18,055 new (NEW) condo units were purchased for $8.1 billion. That’s about $449,000/unit. Like I said – HOT!

We know that more than 50% of those are investor (non-resident) purchases which run highly leveraged (usually 25% down) . The Financial Post runs a good article where one of the showcased examples is an investor with seven properties – holding 2 million in value with 700k equity.

Based on some averages, the investor is spending about 100k/year on mortgages, condo fees, insurance and tax. The investor – if 100% rented all the time is likely pocketing about 34k/year. The game here is the investor is hoping the 7.5% yearly appreciate in condominium value for the last 15 years continues. With that, he’s pocketing and extra $150k/year. Not bad for the risk – $185k/year in income and equity.

So here are the concerns.

For the full year, Toronto may add upwards of 27,000 new condo units on top of current inventory. That’s 45% more than any other year on record. There is also that much inventory slated to be added each year for the next 3 years.

Second, real estate is hot because US, Europe, and many other jurisdictions are facing or have experienced a housing crash with no certainty of recovery. While New York announces the most expensive pre-sale units in history, large multi-story developments have been shelved right left and centre. If Europe tanks, housing prices are going to go low, low, low. With that, international investors have been buying Canada because of our stable economy and the start power of Mark Carney.

When local markets pick up in the US and Europe the money parked in Canadian real estate will flee back to their home countries.

Finally, even in the Canadian banking town Toronto (and I’ve said that banking cities will always perform well for real estate compared to the rest of the country), incomes are flat and the middle class is being squeezed (Bank of Canada indicated last month that income disparity grew significantly last year). That means there is a question if rent levels (which equal investor cash flow) can be supported – or if they will stagnate.

If we are lucky, because Toronto is our financial capital, we could see Toronto continue to appreciate every year until we have prices similar to New York. It’s not out of the question. But investor money is fickle. Both foreign and local money is sensitive to price change, and a slow down in Toronto cost per sqare foot will create a feedback cycle that would be vicious.

Toronto and Singapore Experience the Shoebox Condo

Some trends cover the world, but the underlying reasons may be different. For example, Singapore and Toronto both are experiencing a surge in shoebox condos (500 sqf or less) but for significantly different reasons.

With Singapore, prices on condominiums are averaging $1185USD/sqf – putting the price of anything lager than shoebox well outside the financial means of most local residents.

In Toronto, price is not nearly as sensitive (running about $630USD/sqf), but tax legislation is pushing units to list at $390k or less or suffer, and one bedroom condominiums now make up almost 60% of new construction. This forces smaller shoebox units to be built in order help create consumer choice in a market that prefers one bedroom condominiums.

In both cases though – Singapore and Toronto are both seeing massive preconstruction sales to investors and foreign buyers. This is likely a strong incentive to build shoebox condominiums, as they become more “affordable investments” and require smaller capital down. If that’s the case, shoebox condominiums are creating a new form of downtown transient population – encouraging renters to populate the cores of each city.

I live in an 1150 sqf 2 bedroom condo – with wife and 2 cats. At 500 sqf, one of those would have to go! (I love you hunny!)