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.

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.

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.

Well Below Assessment BS

I was reading an article about a class action suit (still pending resolution, no allegations proven) against the developer and owners of a condominium project. From the article:

The lawsuit alleges that Jurock and his associates provided purchasers with marketing materials stating the purchase price of each unit was about $10,000 below the appraised value. However, the lawsuit claims, they did not have appraisals to support that claim.

On an unrelated property on Mr. Jurock’s website (on the site as of 17 July 2011) is a Hot Property that is “Listed at only $599,000 (well below assessment)”.

So I asked myself, what does “below appraised value mean” – and came to the conclusion it means “the purchaser is being misled”.

It feels that the use of Below Market Value (BMV) is an attempt by the seller to install a belief that the purchase will generate an instant increase in equity when purchased. It’s the mythical money for nothing argument. Purchase this property, and you will instantly have an asset worth more than you purchased it for.

When in reality, the property is worth exactly what you purchased it for (actually, it worth what you purchased it for minus about 5% for the cost of reselling the property and changing a fixed asset into something liquid again).

And there are questions that the class action suit referenced above raises about appraisals – who has performed them (do they work for the developer), is the appraisal reflective of what is actually inside the unit (which could reduce the value), is there actually an appraisal, how long ago was the appraisal performed, and what is causing the property being sold below appraisal value?

As its own, I find an appraisal should be generally ignored or used as a very small part of your decision to purchase a property or home – and always raises more red flags then it answers questions.

Always purchase only if this is a place you want to live, and if you negotiated a price that you feel is appropriate for the market, location, building reliability, and your love of wanting to live in that home (even if you are buying as an investment property – if you wouldn’t love to live in your investment, then it’s likely hard for someone else to emotionally commit to rent the residence as well).

It is almost impossible (I verge on saying totally impossible) to buy a property that on completion of the transaction magically becomes more valuable than it was sold for.

I guess when I see the term BMV, I think (and sorry to car salesmen, I’m running off of a stereotype here) that the realtor is scuzzier than a used car salesman.