February 9, 2018 | condo investment
I don’t have special powers, and I’m not going to tell you definitely where the Toronto market is going to be in the future. With that said, let’s have a look at where it MAY be. Let me try to make this blog about numbers and statistics as much as possible so you can look to some trends happing in the Toronto area condo market. I don’t think I’ll be able to resist sprinkling my opinion in there. After all, this is a blog. And blogs are about opinions. Nonetheless, most of the stats for this blog will be pulled from Urbanation, the statistics gathering juggernaut for all things condo and Toronto.
When trying to wrap your head around 2018 and the Toronto real estate market, it is best to look back at 2017 and see what exactly happened in the rear view mirror. We know that government intervention weighed heavily on 2017 with a foreign buyer tax and rent control. As of January 1, 2018, stress tests that would add 2% to qualifying for all mortgages also made government intervention a little heavy.
But let’s look to see how things have performed. In the GTA condos accounted for 30% of all sales in 2017. In the old city of Toronto, it was 50%. It is estimated that a third of all condo stock in the GTA is used as rentals. Even though condos had better price appreciation last year, there is still a long term widening gap between a condo apartment and a detached house. For example, an average GTA condo in 2007 would cost $264,915 whereas a detached house would cost $470,558. In 2017, a condo apartment in the GTA would cost $512,478 and a detached house would cost $1,098,951. That gap has widened from $200,000 to roughly $600,0000. With very little low rise housing, particularly detached houses, slated to be added to the GTA housing supply, this gap will likely widen.
Still, in 2017, condos proved to be much more stable than houses. In the GTA this would vary by region. Going north in the York region, you would find the most instability in housing in places like Richmond Hill. Places like Durham, where houses are relatively inexpensive compared to other parts of the GTA, prices more durable and more stable.
As far as condos are concerned, the real surprise if 2017 are new construction condos. The number of sales soared in 2017 to 35,074. This in turn has led to a reduction in new condo inventory. Of course, no need to fear, there are many new condos on the way, but with longer development processes and increase construction costs and labour costs, this could take longer to roll out. Surprise, surprise. Condos won’t be delivered on time.
What is surprising in 2017 is the widening gap between new condo pricing and resale condo pricing. Resale is $648/sq ft. New condo is $875/sq ft. In the old city of Toronto it’s $823/sq ft for resale condos and $1031/sq ft for pre-construction city condos. That is a huge gap that would make anyone question whether it is wise to buy new over resale. For investors, it may be wiser to hold off on those new condos and revisit resale. (See graphic in this New and Resale Price Trends Diverging)
Now, here’s a really interesting statistic. The number of investment condo units has been increasing for years. In other words, more and more investors are buying condos to rent out as income properties. This may sound like a bad idea to some who doesn’t want to live or own in a building with high rentals, but in a city that currently has a vacancy rate that has fallen to minuscule .7% (lowest in 15 years), those investors offer rental supply to a rental-starved city.
In 2017, the number of investment units in condos did not increase for the first time in a very long time. Why you may be wondering? I think there are many investors who are selling their units because they are turned off my rent control legislation that has come out in 2017 that makes owning a rental condo unit not worth their while. You cannot increase rent beyond the rent control limit. And it is difficult to remove tenants. Legislation that appeared to protect tenants (and many may very well have needed some protection) may be leading to fewer rental units. On top of that, 1000 units were lost when buildings that were originally planning on being constructed as rental buildings switched to becoming condos after the rent controls went in.
There are rental unit that are still being built, but we are not meeting the demand of what is needed. With greater pressure on vacancy rates, rents will continue to increase. This is why those who do buy investment condos will buy with a negative cash flow. If they wait long enough, the rents will often deliver a positive cash flow. Here is a history of some Toronto buildings that have generated positive cash flow (or not) and equity gains: Investor Returns Table on Toronto Condos
This year many “experts” anticipate that rents will go higher once again. 4-5% for year on average. In 2017, rents increased 9.1%. So far in 2018, we are still seeing strong activity with first time buyers, particularly in the old city of Toronto. We are also seeing buyers in the old city of Toronto who are in the move-up range under $800,000 buying properties. Expect prices to go up again in condos this year on average of 5%. This will vary depending on where you live. From February to April of 2017, we saw some of the highest prices of that year. So, there will be a lot of comparing those months February to April in 2018. The media may be doom and gloomy over this time, but it will pass and become rosy again.
If you are in a detached house. Sit tight. Some neighbourhoods are roaring back already. It will take time. Interest rates and more government intervention will be your enemy if you own real estate. We appear to be heading into a Goldilocks period where growth is not big enough to trigger inflation and a series of many interest rate hikes, but enough 2-3% growth to keep things growing. As always take any predictions with many grains of salt. There are just too many variables to know what’s coming!