Remember a few years ago when almost everyone was worried that condos were in massive oversupply all over Toronto? Chicken Littles around the city were running through the street telling us the sky was falling, or at least the price of properties in Toronto. The Toronto real estate bubble, it was thought, was pumped up to capacity and the air could not be contained any longer. For many it would appear that the condo market was going to be the big pin to break the bubble and bring everything down.
Why were condos to blame? It was all about the numbers. For several years, it looked like Toronto could not build condos fast enough. Visitors came in from American recession ravaged cities to look around Toronto and wonder why there was so much construction in all directions when prices where plummeting back home. The belief was there there was just too many condos under construction. Toronto was holding the record for the most condos under construction in North America for several years in a row. It’s amazing if you consider that cities like New York are four to five times larger yet had fewer condos under construction back then. The question on everyone’s mind was this: Who is going to live in all of those condos being built?
Today in 2016, things are different. I was recently in a bidding war for a two bedroom condo. The thing is, no one, not even the seller was expecting a bidding war. Like any other listings, the property was put on the market, received many bookings within a day or two. The listing agent was not anticipating that there would be a bidding war. There was no intention to hold back offers until a certain date in order to bring in as much buyers as possible. She simply did what many condo owners and their representatives do. They list their property and hope someone puts in an offer. To everyone’s surprises the seller had four offers in less than two days. And I’m glad to say my battle strategies paid off and I was able to negotiate this unit for my clients. I should point out that the listing was priced reasonably in a building that often did not have bidding wars, but the unit was an exception in its renovation and location in the building. Still, there was much more demand than anyone had expected.
But maybe this was an anomaly. Then I saw it happen again. A two bedroom unit priced at market value lasted five hours on the MLS. More and more, it appears that a good condo in a worthy building would barely last long enough for buyers to go in. What I am seeing is quickly growing demand for two bedroom condos. What I’m not seeing is panic over the condo market. So, what happened here? Why is the condo market not the focus of worry and fear that it used to be? Why are two bedroom units in the right building in such demand?
First, let’s talk about the basics of economics: supply and demand. A few years ago, the fear was that there was an oversupply of condos coming to the Toronto market. And to be clear, this may be a real concern to this day. It is true that the maximum number of new condos hitting the market peaked about two years ago. Still, we do have a lot of new condos units coming to market. So, this has not changed. There are a lot of new units that need to be absorbed, but not as much as in previous years. What has changed is the price point of many houses. Unlike condos, houses have grown in value much more since 2008 to the point where many people who would have bought a house in 2008 would be priced out of their own home with today’s prices, and may be buying a condo instead. The condo market has been propped up by folks exiting the house market and looking for a condo instead. Condos have increased in value since 2008, but for many years the gains were small, and in some buildings, values actually fell.
The other key contribution to the multiple offers and quickness of sale on the condos I came across has to do with size. Two bedroom condos are becoming much more valuable than they used to be. There was a time, not too long ago, that a developer would prefer not to build two bedroom condos. And to build a three bedroom condo was a developer’s nightmare because no one wanted to buy them. Some city councillors at the time, like Adam Vaughan, even suggested we legislate that the developers must build more three bedroom condos so we have more selection in condos for families who want to live in the city at a reasonable price. To this day though, if you want three bedrooms, you are usually focused on a three bedroom house, the most common type of house. Unlike other cities, like New York or Chicago, Toronto condos are overwhelmingly one bedrooom units. For the longest time, condos were much more in demand as a one bedroom.
Things have changed though. Now, two bedroom condos of a decent size are much more in demand. Size does matter. Those tiny condos in giant buildings will still sell, but if you have a larger two bedroom in a good condo, 2016 will be likely be very good to you if you are going to sell. Even if the City or Toronto developers feel they should build more condos that are two or three bedroom, it would take years and years for them to catch up. The short term shows us that two bedroom condos are joining the ranks of houses, condo townhouses and conversions. Short supply with more buyers than product.
It just goes to show you that you never know what will happen with Toronto’s real estate market. Just when fear is taking over, there is a plot twist and a move in a different direction. All in all, condos seem tame and reasonable in 2016, not the thing that is going to bring down the Toronto real estate market.