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.

Parking Spaces the New Investment Vehicle in Gridlocked Housing Market

For high density housing, multiple parking stalls attached to a unit can be a major incentive for purchasers. Where developers will commonly building only slightly more than one parking spot per unit, the option to have a second stall is always appreciated – especially with the wealthy who often own multiple vehicles.

There are normally two types of parking associated with condominiums – assigned and deeded.

Assigned parking is normally common property that the board assigns to units, sometimes on a yearly or multi-year basis, as an exclusive use area much like balconies. The space is common property, but you are the sole person allowed to access it. Transfer of the stall is at the control of the board.

Deeded acts much like your unit – often with its own tax roll. These can be sold or traded just like a unit can be, but often with caveats on who can buy. Deeded titles normally have unit factors attached to them as well – so selling or buying them will change your monthly condominium contribution.

A good condominium corporation will have bylaws in place that limit ownership of a stall to those who also own units. If you sell your unit, you are also required to sell your stalls to other owners (normally the person buying). Bad corporations allow anybody to own parking stalls – which over time tends to put them in non-owner hands, managed by people who have little incentive in the maintenance of the building as a residence.

For many urban centers, parking spots are maintaining their value or rising – even when units are dropping in price. A parking unit in Boston (200 sq. feet) sold for $125,000. Toronto sold a spot for $100,000.

These are in part driven by municipal regulations that are either lowering the minimum number of parking stalls developers are required to build per unit built, or in some cases capping the amount of stalls within very dense regions in order to reduce traffic issues. Both of these will force parking stall prices higher, especially when newer developments (with fewer parking spaces) get infilled into spaces previous held by lower density and higher parking ratio buildings.

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.

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.

Toronto Condo Starts Up 70% Compared to Last Year. WTF?

Ok, maybe it’s all those people fleeing those condominiums with no reserve funds and huge debts only to do the same with another condo! But in this, still recession and lackluster recovery, Toronto is going gangbusters for condominiums!

Carrick: Strong bank sector, mixed urban use spurs condominium demand in Toronto
In the context of a highly regarded Canadian economy, Toronto kicks up its heels