Would you be surprised if I told you that highly regarded Toronto real estate predictions turned out to be wrong? Maybe not, but let me explain the latest predictions to derail anyway. Back in 2014 Global News ran the headline Toronto Condo Prices to Fall Amid ‘Striking’ Oversupply. This was not just any old opinion piece but a carefully crafted article based on a TD Bank report. On a more subtle note, but with the same message, the Toronto Star announced to the world in 2015 Toronto Condo Prices May Decline 10% according to a Fitch report. It doesn’t stop there. There are more articles and news segments with the same message around that time. In 2014 and 2015 there was almost a unanimous belief that the Toronto condo market was overflowing with too many condo units. In those years, the rate of new units hitting the market was around 70,000 units per year. This was a peak of new units hitting the Toronto market in 2014 and 2015 and almost everyone felt they would not be absorbed. But they were.
Now, as we sit here smugly at the end of 2016, we can say that condos are in demand in a way that we have not seen since well before 2008. And even though I don’t have much faith in real estate predictions, I do dare to venture one anyway: The revived Toronto condo demand will not slow down soon.
For a long time the house market and the condo market were two very different animals. The house market has been the darling of housing types. The best friend of price appreciation. Despite a brief dip around 2008, the Toronto market for houses has seen very healthy increase every year since the late 90s. It makes sense. The city was growing. Traffic was becoming more unbearable for the drive out the the suburbs. On the supply side, no one was building very many new houses in Toronto. So, the supply of houses remained low and demand strong. It’s recipe for continuing price appreciation. We have seen some neighbourhoods transform. They were once a place to buy an affordable starter house. Think Leslieville, the Junction, the Junction Triangle and even Long Branch out in Etobicoke where first time buyers often looked before 2012.Condos took a different path. The supply side of condos has not exhibited the same supply constraints as houses. As I mentioned, condos were suppose to be in “oversupply” in 2014 and 2015. For a long time, land was available to build condos and even encouraged by government policies. So, developers reached for the sky. For many years, Toronto had the distinction of having the most new condo developments in a North American city for several years in a row up until about 2014. For 2014 until mid 2015, the question became, who is going to live in all of these condos?
With all those condos coming to market, price appreciation was not always a fact of life for condo owners. Some owners who bought before 2008 even saw the value of their condos slip in value. Some condos performed well: the conversion loft, the condo townhouse, and the boutique condo, but on average they did not have the runaway prices that houses had. Condo owners would look on enviously at houses as house owners became richer ever year. Some condos would sit on the market for 30 days before they may receive an offer.
These days, condos have a lot more in common with houses than they have had for a long time. What changed? Why do condos have more bidding wars, quicker sales, and great price appreciation in general?
Here are a number of reasons why condos are so over the oversupply fears:
- The New Starter Home – Many of those who would have bought a starter home as a small house in an emerging neighbourhood several years ago are now looking to buy a 2 bedroom condo. Those generally priced out of buying a house have turned to condos, increasing the number of people buying condos. So, there is much more demand on condos than there used to be. This is often referred to as the “affordability advantage”. Condos have the advantage over houses because they can attract more buyers. If condos become more expensive, it will in turn put pressure on the rental market leading to higher residential rental prices.
- The Power of City Living – The demand to live in the city does not seem to have waned. More and more people want to live in walkable neighbourhoods, something a condo can often provide. Of course, it’s all about the commute too. If you live in the city, and you need to drive home to an affordable house, you’ll be driving for a long time. It would be easier just live in the city than take on a two hour plus daily commute.
- Spaced Out – Thirdly, we’re running out of space. You know all the Blog TO photos you see of Toronto in the 80s and 90s full of parking lots? Well almost all of those parking lots are gone. Space is at a premium now. There is less room to build. We certainly have some more room, but just not as much as we used to have.
- Follow the Stats – According to Urbanation, the last two quarters of 2016 have shown a significant decrease in condo inventory. So much so that we are at a decade low for resale and new condos hitting the market.
- On To A Good Thing – And finally, it is important to note that some developers have turned to building rental properties instead of condos because they have seen how well condo owners have done renting their property. The vacancy rate is low in Toronto and rents have increased significantly as well. This brings more investors to condos and more developers to rental properties
With all that said, the strategies used to sell houses are starting to look a lot like the ones to sell condos. More condo sellers are holding back offers until an offer day in the anticipation of receiving multiple offers. Many sell over asking. Like the Toronto house market, the Toronto condo market has become a seller’s market.
In the near future, I would say many Toronto condos are looking more positive as an investment than they have for awhile. Of course, real estate is a complicated thing. There are other factors at play like interest rates, the health of the economy, and government policies, but from simple supply and demand side of things, condos are looking pretty good.