So Summer is here with toasty temperatures, prompting Torontonians to strip down to the outdoor basics. According to Debonair.com, that means all the cool kids, hipsters and trendys are strutting in attire with color blocking fabrics, especially those featuring a gradient or ombre tie-dye effect as you can see in the photo above, featuring H&M's now sold-out colorful 1980s-inspired trunks.
Yes, the 1980s is beginning to make an appearance in fashion again. Get ready for bigger shoulder pads and cinched waists. But the real question is: "If we're cycling back to the 1980s in fashion, will it also be repeated in real estate when Toronto property values peaked in a bubble and began a precipitous decline, crashing by as much 30 percent?"
Welcome to the latest installment of urbaneer’s prognostication: Our Summer 2012 Real Estate Forecast.
It is a well-known fact that there are Seasons to Real Estate, which in many ways mirrors the seasons found in nature. In summer, Torontonians get seduced by the warm weather and thoughts of vacations, barbecues and beach time. With attention focused elsewhere, the real estate market typically slows. What also almost always happens at this time of year is that the press leap onto this seasonal slowdown as a harbinger of bad times. Headlines over the last few weeks that predict doom and gloom in the housing market, with an added level of scrutiny and warning to Toronto- (specifically to the potentially over-saturated condominium market), have grabbed much attention.
At urbaneer.com, monitoring the media is essential as a gauge to market reaction, and given the frequency and the drama of the stories that have surfaced in the last few weeks, we have a lot to consider.
While it is always important to understand that part of the function of a headline is to grab and engage a reader, often using shock & awe as a compelling lure, the real story often requires greater context. However, with this latest rash of headlines, could this latest set of data and reports be accurate this time around? Are there elements that are newly present or that have found new momentum that could seriously, detrimentally, impact the Toronto housing market? Furthermore, how do these elements impact Buyers and Sellers in the bigger picture, and what does urbaneer.com see happening in the coming months?
History has a way of repeating itself (just look at Fashion), which is reason enough to be cautious. I began my real estate career on a market precipice in 1989, when values plummeted more than 30% and took years to climb back up again. Again, recently we saw what happens when giants fell in the recent sub-prime mortgage crisis. Although there are several reasons to suggest why this could never happen North of the border; there is cause to pause and suspect that Toronto, being one of the leading cities in the world for new condominium construction, combined with the uncertain and potentially unstable number of elements that surround this market (which ultimately contribute to, if not depend on, its health), is creating an increasing likelihood of a perfect storm, Real Estate style. While this may seem like big news, judging by the level of alarm presented in the headlines, (read “Toronto Braces for a Deflating Condo Bubble”) this is the kind of thing urbaneer.com has been calling for some time, as you can read in our previous seasonal forecasts (click HERE).
There is more to understanding the ebb and flow of the housing cycle than throwing your Real Estate tea leaves in the air. We temper speculation with data and experience, which lends some stability to the accuracy of our aim when shooting ahead. Our concerns of an “it’s too good to be true” scenario that presented itself in the market through last year have proved to be valid.
Condominium Market Cracking?
New stats released by the Canadian Real Estate Association (CREA) show that the hot Toronto market “eclipsed” other centres in terms of price hikes in May, during which Toronto prices rose by 7.93% with Calgary in a distant second at 4.84% (read the story HERE in the Globe and Mail).
As these things tend to move in cycles, the gravity of the market will eventually pull these figures downwards. The question remains how much, and what property type/areas will bear the brunt? According to TD Bank, there is a 15% price drop coming over the medium term in centres like Toronto (and Vancouver), (read the full story HERE) and is attributed to an oversupply of new condominiums and the ability of an oversaturated market to absorb these units. There are concerns that this oversupply, and the steady rise of multi-residential building starts over the course of the last year, will continue to wreak havoc and loosen the tenuous hold that the market currently has on supply and demand. Some believe that the absorption rate for these new builds has gone far beyond a “healthy” range, skyrocketing from 20 months to 34 months in just a six month window (read that full story HERE).
To put this in further context, according to the latest data from the Toronto Real Estate Board (TREB), new listings in Toronto jumped by 20% in the month of May. New listings for condo units outpaced new listings for single family homes in the area by a margin of about a 1000. However (and this is where we may begin to see evidence of a softening of the condo market), year-over-year, in the MLS® Home Price Index, price appreciation for single family homes has doubled in relation to those for condos. It’s about supply and demand, and the gap is expected to grow as more condos turn into the market.
We have long said that if cracks were going to appear in the hot Toronto housing market, they would first show themselves in the condominium market. We’d go a step further now to say that that ripples for this will display in high-rise point tower condo market in locations attractive to international and local investors (Cityplace, for example) and the suburban 905 areas before it impacts the condo market as a whole.
The Role of the Investor
It’s not just fears of oversupply that cause concern. There is the fact that many of these new condominiums are being snapped up by investors, many of whom are looking to flip their properties.
To put this in context, Urbanation, a source for stats on the Toronto condo market, predicts that somewhere in the neighbourhood of 35,000 new units will present themselves in the market through 2012.
According to data from TREB, prices and activity in condominium resales rose only moderately in the first quarter of 2012. They also noted that 2011 represented a record year in condominium completions; of which a larger number, as we have speculated in the past, are being held by foreign investors, who TREB (and a number of other statistic-producing bodies) believe are starting to liquidate their assets, which is effectively softened prices.
If the momentum continues, and is compounded by the massive numbers of new units nearing completion in the coming months, and investors decide to liquidate in the same time frame, the downward pressure could be substantial. Although it has been argued that property values are less vulnerable to an adjustment because foreign investors tend to favour cash deals, rather than asset-leverage financing which removes the risk of a large group of people “owing more than they own” and causing mortgage defaults, it is the sheer numbers and volume associated with this group that pose a real threat to the value of Toronto condominiums, and make a potential oversupply of stock that much more worrisome. Our concern extends mostly to condominium owners in buildings where a substantial number of units are investor owned.
This isn't necessarily going to pop like a Bubble. At the moment what is a trickle, could turn into flow, and then a flood of product coming for sale. This is mostly dependent on the pace new buildings are completed and registered with Buyers taking title to their units.
There are a lot of projects originally sold three to four years ago in pre-development sales programmes which are now nearing completion. These Buyers are approaching the time where they are contractually obliged in their Agreement of Purchase and Sale to take occupancy of their unit when it is finished, even though this may be anywhere from 6 to 18 months before the entire building is registered as a condominium and the Buyer officially completes the purchase, places their own mortgage (if required) and hold title to the unit. During this time frame, which can legally be up to 18 months, the Buyer is required to pay the developer a 'rent' that is the equivalent total sum of the estimated property taxes, monthly common fees, and the interest costs on the balance of the purchase price owed to the developer after deducting the deposits already paid by the Buyer (this is called the 'Interim Occupancy Period'). To help cover these costs, investors often rent their suites to tenants from the point the unit is ready for occupancy until the building is registered and the buyer takes ownership. Once the building is registered, it's not unusual to see investors cashing out after the anniversary of their tenants one or two year leases. In other words, much of the investor-purchased product nearing completion may still not come to market for one to two years.
It's not unusual in any market condition for a lot of suites to come to market the first year after the condominium is registered. Not only are investors taking their speculative profits, but many owner occupants also list to sell because their lives have dramatically changed since they made their original preconstruction purchase from the developer upwards of four years earlier. If you reflect on your own life path, in a span of four years people can go from single to attached, have a baby, get divorced, or be relocated. For several owners, their suites simply will no longer suit their needs, thereby prompting a sale in the first year.
While it's very typical to see a high turnover during the first year after a condominium gets registered, one has to be prudent, if not a bit wary, of the risks. Remember, the value of any suite in a condominium is always contingent on the price the most motivated of sellers of a similar unit is willing to accept. Even if the broader real estate market is experiencing a rise in values, if you have a lot of investors and owner occupants listing at the same time in one particular building, and that building contains hundreds of similar sized suites, the supply of units may exceed the available pool of interested Buyers at that specific time. If that happens, in order to stimulate a sale the most desperate of sellers are forced to reduce their price to attract the next Buyer. That sale price will then set the barometer of value for future sales. If the demand doesn't absorb the supply of listings in a timely manner, then values will continue to drop until the supply is balanced.
It’s not just the headlines that predict these particular scenarios. It is actually happening, as we discovered last week when researching a recently completed condominium located near Lake Shore and Bathurst Avenue. In this one particular building containing 187 suites, over the first seven months of this year 57 units have come on and off the market for sale. At the time of writing this forecast, 20 are currently listed, 13 have sold, and 24 have been taken off the market. But for how long? While this is only one example in a sea of condominiums, if numbers help frame a story these ones speak loud and clear: Over 30% of the entire building has been listed for sale this year alone. And this is a relatively small building. What if it contained 500 suites?
Do I not buy a Condo?
We believe that when it comes to real estate, slow and steady wins the race. So if you're a candidate for a condominium purchase, whether by the limits of affordability, or because you prefer the lifestyle benefits associated with turn-key living, the urbaneer team wouldn't discourage you from making a purchase. However, we would want you to take great care and counsel in selecting the best of the best within your budget. As a team who counsels buyers that it generally takes six months to a year to find the 'right' property, it's very much because we spend more time talking you out of making the wrong purchase, and guiding you to choosing the right property.
What to look for
What has sustained the Toronto housing market in the past and will continue to support it in the future is the tried and true mantra of 'location, location, location'. Proximity to green space, public transportation and a village-shopping environment will still be major drivers in the value of any property. When we look at the condominium market as a whole, there are swaths of ubiquitous car-friendly- pedestrian-windy architecturally-banal socially-isolated could-be-anywhere mid and high-rise towers chock-a-block with one-size, one-style, one-occupant suites. The fueling engine of a long-running real estate boom have produced so many of these placeless spaces they dominate the condominium market. But within this sea of oneness, some extremely special gems exist that reflect the true ideals of contemporary collective living. These are what any prudent buyer should purchase.
When it comes to making a condominium purchase, avoid the common teeny tiny cracker jack boxes in the sky which dominate the condominium market, as they're the properties most likely to suffer in a market adjustment. Instead, seek a condminium that incorporates as many of the following criteria: a well-designed well-proportioned well-built space plan; features that are rare and desirable including high ceilings, attractive views, abundant light, outdoor space, gas cooking, or a fireplace; situated in a stable, reputable, primarily owner-occupied complex that is ideally at least two or three years old (so that all those first-to-list suites are now re-sold and the building is well-managed and operating smoothly); and located in a stellar demand identifiable neighbourhood coveted by the local market (like the St. Lawrence Market, Queen West Village, or College Street).
The potential oversupply of condominiums is not only the issue urbaneer.com is addressing in this Summer 2012 Real Estate Forecast. Not only is there more at stake in these particular scenarios, there are also other parts to this troubling puzzle. In the last couple of weeks, Canada's Minister of Finance Jim Flaherty, spurred on in part by the exact market condition listed above, has introduced new mortgage lending restrictions in an effort to protect market vulnerability when it comes to financing.
Stay tuned for urbaneer.com’s second compelling installment of our 2012 Summer Real Estate Forecast in which we discuss these mortgage changes, and how they may impact our market.
At urbaneer.com, whether you're purchasing a personal residence, or you're investing in your financial future, we're here to help! Serving liberated, progressive pro-urban Torontonians for over two decades, our friendly, fashionable boutique real estate service always has your interests at heart. Building clientele for life, consider letting us help build your real estate portfolio, one property at a time.
By the way, did you read our recent newsletter "What Property Will You Invest In"? Click HERE to link to it.
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