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.

Real Estate Lawyer Recommends Removing Mortgage Protections to Stimulate Greed

It really shouldn’t surprise me that a lawyer who “represents developers, builders, lenders, corporate and institutional property owners and real estate brokers” advocates that the very protections put into place because of the poor actions of industry he represents should be repealed, so the industry can wallow in greed to which they would “start making money in housing, and lots of it.”

Just to be clear from his opinion, Seth G. Weissman says –

Rather than looking at investors as vultures or potential mortgage fraudsters, an attitudinal shift needs to occur where they are embraced as the potential saviors of the housing market that they are. Until investors start making money in housing, and lots of it, there will be no recovery in the housing market. This will only occur when disincentives to invest are eliminated. Like in any other market, when fear is replaced with greed, housing inventory will decline, prices will rise and a sense of urgency to buy will be restored to the market.

Very heady words there – including saviour. The premise argued seems to be that higher house prices should be the directed effort the industry and that would be a good thing.

But good isn’t about increasing housing values. It’s about generating fair market value of the actual product between buyer and seller. That’s not what we had during the recent boom.

Like any boom and bust cycle (all the way back to tulips), investors focused greed created immense inequity between the true value of a product and cost of the products.

Investors don’t value the idea of a fair market value of the property – they value the ability to flip a product as quickly as possible at a profit. The investor is bullish on taking a product in a boom cycle and encouraging the market to continue to increase well beyond the rate of inflation (artificially – by creating a sense of urgency, but not an actual urgency). On the flip, they also look to strip the product of any removable value converting it into their own wealth. Indeed, anything left on the table for the new purchaser is lost revenue for the investor.

The wreckage of the last boom cycle is still showing it’s scars upon the market and individuals (it really has been scant months). The damaging wake of a greedy industry is responsible for why so many properties still have mortgages greater than their value. The market hasn’t had time to correct. The burst hasn’t completed.

To call now for the removal of barriers preventing naked greed in the real estate industry, and to once again fleece the public, even before the bust completes, well, is pure greed. But what else should I expect.