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!)

Improving the Resale Price of Your Condominium Association’s Units

Earlier this year I consulted with a condominium association that felt their units were selling at well below market value. We did a review of the grounds, the prices, and the resent selling prices and confirmed their feelings with actual numbers. Their units were selling for well less than value.

The problem comes from two main problems – realtors price units in comparison with the local area, and realtors are really lazy. Ok, maybe not intentionally lazy, but their compensation is based on selling as many units with as little time spent selling each unit. As such, realtors are motivated on encouraging the seller to accept the lowest price possible to list. Owners that balk at the suggested price have a huge uphill battle to convince the realtor to spend time on actively selling a unit at a higher price – they still will list it, but if it takes too much effort to sell then they focus on their portfolio of “easier sales.”

The property is truly unique for the area – a community that is still 15 minutes from the downtown core (non-rush hour) and includes two fully sized ponds (and ponds understates the water immensely), they have large residences for the area, and have an excessively proactive grounds and building maintenance program.

We sat down and talked about a few things with their Resale Committee. It included a variety of initiatives including an aggressive marketing campaign to owners encouraging them to seek their condo board before a realtor, the board building a sales profile for the units – effectively doing the realtor’s job for them, and coaching to owners on how to talk to their realtor and convince them that a higher price for these condos will be as easy to sell as a lower priced unit somewhere else.

One really important factor is to build a large photo and video repository of the water works – with the numerous bunnies, squirrels, and baby ducks that sit amongst the reeds (seriously, it’s a water habitat oasis in Calgary) – and build a portfolio of all the seasons.

The suggestion that the board or other residents be accessible for potential purchasers to meet was also highly encouraged. While in person is best, I noticed a residence in New Jersey has interviews with four of their owners posted positive experiences to YouTube. This is a phenomenal way to show the pride owners have and convey to new purchasers. It will also help make the case to a realtor that these properties will sell at higher costs.

In total, through the consultation, we developed several activities that should add over 8.5 million dollars to the value of all the units in the corporation (adding over 100k/unit) over the next 2 to 3 years. This will bring the units in line with their true value.

Case Study On Condominium Price: Cloud 9 Sky Flats

Some people look at the price of housing much like stocks – if they go down enough, then at some point they have to be a great value to buy. Today we are looking at The Cloud 9 Sky Flats at 5601 Smetana Drive, Lake Minnetonka Communities, 55343.

The Cloud 9 a 165 unit conversion from an office building into a condominium that was turned over from the developer in 2005. Conversion from an office building is a little uncommon in itself (though not unheard of) and brings with it some baggage – including in this case windows that don’t open, a lack of balconies, floor plans not originally designed for residence, and large lot based parking among other factors.

Zillow shows four units currently for sale in the complex. Most attractive to purchasers are the unit prices which average at $152/sqf. This is around 50% of the cost of the units from only a few years ago (2006 peak). Half off a condominium seems like a good price on its own, but the condominium has several other issues that may mean the price is appropriate, and not at a discount.

First off, multiple individuals have been charged with mortgage fraud cash back scheme on over 40 of the units sold in The Cloud 9 during 2006 through 2008. These fraudulent sales both artificially inflated the price of the units, and then assisted in the price collapse as more than 80% of those sales went into foreclosure.

Second, the condominium appears to have a maximum rental limit of 20% of the total units – of which that number has been met. Current owners will have difficulty renting until other units stop, and investors are blocked from buying because they are unable to rent the unit.

Third, three of the four units are priced above the Zillow Zestimate on average by 7%, indicating that compared to the surrounding area, the units may still be overpriced. The fourth is 15% above the Zestimate, but has been on the market for 304 days, and may have been set when prices could have been higher.

Fourth, Re/Max Results show 43 active listings in the building (remember, in a condominium of 165 units) – or more than 1/4 of the units are available for purchase. If you buy into The Cloud 9, there will still be one quarter of your neighbours trying to sell, and as such actively pushing the value of you condominium down.

I always indicate that when buying housing, you should always buy what you think best suits your life, in a price that you can afford – with some financial room in case of unexpected costs or job loss. Outside of that, little matters if you are buying a home, including the current price unless you hope to flip or sell in only a few years.

If the question is if The Cloud 9 represents a good deal – it might be, but not if you base that decision compared to its price 5 years ago. There are enough issues to show that the price was artificially inflated, that the excitement over an office conversion (with all the related baggage) has worn off, there are current bylaws which encourage downward pressure on the price of units, and more than 1/4 of the owners want to abandon and sell out from the building (raising the question of why).

Importantly, for a building with so many foreclosures – at least 1/3 historically – and so many currently on the market, you should look at the financial statements of the corporation closely. Check to see if the foreclosures or current sellers have led to the condominium carrying a deficit because of a lack of paid condominium fees. If there is a deficit, new owners will at some time have to pay for that deficit, so make sure the price of the condominium reflects a discount for any deficit carried by the condominium, and you have enough cash if the condominium issues a special assessment or raises monthly contributions.

Over Supply, Investor Demand, Interest Rates, May Decimate Toronto Condominium Prices

I often suggest to my American friends that the read the Globe and Mail for a non-partisan, third-party, observation of the US. They are so bombarded with the us-or-them approach in US media (everything is either a Republican source or a Democrat source) that the Globe’s articles on US politics and economy have become a powerful neutral source of information for many of them.

So it’s in the same light that I read a recent Wall Street Journal on the likelihood significant correction in the Toronto condominium market. I mean, if a US paper wants to spend reams of paper informing their citizens about a growing risk in our condominium market, maybe its worthwhile listening.

To summarize –

1. The WSJ equates Toronto to Miami – where foreign buyers created a real estate bubble that burst, leaving exceptionally large numbers of abandoned units.
2. There are 40,000 units under construction, increasing the supply by 20% in the next 24 months.
3. Bank of Canada Governor Carney has expressed condominium prices are being driven by investors not owners
4. 60% or so of all pre-construction unit sales are investors, not owners
5. Ratios are rising rapidly between yearly rent and unit cost (moving above the magic ratio of 1:16 yearly rent to unit cost)

As the condominium prices driven by investor demand have risen to about $305,000 – even a one percent increase in lending rates would require $255/month increase in rent to cover the new rate. Interest rate increases matched with a 20% increase in available units (which should help suppress the costs – or in investor terms, equity) in units, Toronto could see a very big and self-feeding drop in unit prices over the next two years.

So says a non-partisan observer looking in.

A Condo you will never be able to afford – $98.5 Million USD

The tag line is:

Not only do you live at the centre of the universe, you overlook it

And for that right person who feels that they live (nay, are) the centre of the universe, there is now a condominium in construction that will have enough square footage to hold every cranny of your massiveness. The one57.

There are actually two (2!) of these apartments at this price – the 75^th floor 13,554 ($7,267/sqf) square foot, and the (for the more refined) 90^th floor 10,923 ($9,018/sqf) square foot residence.

I can honestly say that I don’t have the funds to live there.

How Much Can I Rent My Condo For

The easy answer is “whatever a tenant is willing to pay.” That answer though makes it difficult as an owner to predict the average rent that can be charged over a period of 5 or 10 years, and thereby determine if it is economically feasible to rent their unit, or if they should simply sell.

It’s an important decision – because margins on rentals can be very thin if the unit is highly mortgaged.

Certainly part of the process is to check what similar units are renting for, near where your unit exists. Maybe it also includes looking at some historical rental data. But good planning usually involves a bit of a formula.

There are two formulas – one on average income, and one on the unit price.

Average Income

As an owner, look at the average income your tenant may have. When we rented our unit – a two bedroom – we assumed a young single male with either a female or male roommate. In Canada for 2009 A non-elderly male (average) and a non-elderly female (average) make 40,600 and 35,800 respectively. Combined they would have 76,400 in income (both before tax).

The maximum a person should effectively pay in rent (including utilities) is 30% pre-tax. Because our condominium includes water, waste and electricity in the condominium fee, we don’t have to factor those into the 30%. So from an average income perspective, we should be able to charge about 1910/month. This turned out to be well over what the local market turned out to be – probably because other units don’t include electric, and maybe we are thinking that one or both might be students, which might reduce the (average to non-earner) income. If we change the female to non-earner, her income goes to 18,100 – or now a total income of 58700. 30% of that number is $1467.50/month, and if you subtract utilities (to be competitive with the market) then you get about $1387.50/month expected rent.

Unit Price

There is a rule of thumb that indicates if the cost of the unit is 15x or less the rental cost (yearly basis), then people will migrate from renting to buying. If the unit is 16x or more the rental cost people will continue renting. The smaller the percentage of the unit they pay per year, the better the odds of renting the unit. The sweet spot seems to be 16x or higher cost:rental makes better economic sense.

Assuming that we want to charge the highest rent, but still have it make worthwhile sense to a renter, we want to charge a rent that is 1/16 the cost of the unit. If we were desperate to rent the unit, we might charge 1/17 or even 1/21 of the cost – both being much more attractive to a renter. The city of Calgary places our Fair Market Value at $248,000. So our maximized rent would be 248,000 / 12 (months) / 16 (our ratio) = $1291. If we subtract utilities, we would be renting at $1211/month.

Which Formula Works

We are successfully renting our unit at $1200/month. It’s in line with the other local rents, and is competitive for both the city and the rental market (which changes as rental occupancy goes up and down). From a personal perspective, the Unit Price approach seems to be easy and very close to the actual rental amount. We should be aware though that if the rental market softens, we could expect to see rental rates at lower then 1/16 – if it was at 1/19, then the market would likely only support $1007 rent (or 17% cheaper), something we should be aware of.

The income ratio tells us the type of people we are likely going to be interviewing – with a pre-tax income of rent X 12 / .3 or in our case (at $1200) about $48,000 before tax.

Buy Condos Where The Financial Districts Are

I’ve picked the wrong profession. Alas, if my mother only wanted me to be a banker and read to me the unabridged version of Scrooge (where he doesn’t feel remorse), I coulda shoulda woulda been rich.

It appears that the majority of the super-rich, the top 0.1% (or top 1/1000), has a propensity to be from the banking sector. This group forms the largest job based income generation of the super-rich. Indeed, it should be hard to be poor for even when you mess up people will still give you $20.3 billion dollars as a reward.

Taking a slightly different story line – both Toronto, Manhattan and Brooklyn have shown tremendous growth in condominium sales, both regular cost (which still can be half a million and more), and the ultra-expensive.

Which makes me think – if the richest group of people are from the banking sector, and they have collectively almost 40% of the nation’s wealth, and they like living near work; then the safest bet for finding condominiums values that will perform better in the overall economy (they still go down in poor times, just not as much) will be in their neighbourhood. This likely explains the current condominium craze in financial centres – where condo sales and cost per foot2/m2 is setting new records, while outside of financial areas condo prices remain stagnant or drop.

We’re entering a new consolidation of wealth – and it will reflect strongly in the housing in the next few years. Condominium prices will perform above average in the financial hearts of the nation.

Condos or Cars

Condos cheaper than Porsches. A Porsche 911 (including tires) costs $91,450 USD (Porsche USA).The median price in the first quarter for a previously owned condo in Miami-Fort Lauderdale was $79,200, USD (National Association of Realtors). Ahh, which do I want more?