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.