Spring/Summer Forecast 2013: Be Wary of the Condo Crunch

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Welcome to the second installment of urbaneer’s current round of prognostication: our Spring/Summer forecast for 2013 on Toronto’s condominium market.

Last year we predicted we’d be in for a wonky market. Well, it’s come true. Click HERE to see last year’s forecast.

Like in nature, real estate follows a cycle of seasons. While there are four distinct seasons in our Canadian climate, the real estate market has but three, each with its own unique characteristics that contribute to the cyclic nature of buying and selling real estate. In our opinion, the months of March and April are critical months where the momentum of demand will cycle to its highest while the supply of good housing stock will be at its lowest. In other words, the spring market historically tends to be the most intense time of the year for real estate! Click HERE to read our Seasons To Real Estate newsletter.

Toronto is characterized as a city of neigbourhoods, but the market can be segmented even further, into property type each with different stories and varying impact on the overall market.

Looking specifically at the condo market, buyer activity had become notably quiet at the end of last year, which effectively pushed property values for many units down, leaving some Sellers in a negative equity position. We reported this first hand in our ongoing Tales From The Real Estate Trenches back in November 2012.

This speedy drop in values over a sixty day period mirrored the decline in 2008 when the global financial crisis froze the market. Back then, as the New Year rolled into 2009, the federal government slashed the bank rate and mortgages became abundantly cheap, encouraging Purchasers to leap back into buying. The ten percent drop in values quickly evaporated in a matter of weeks as the market gained steam, and then prices spiked another ten to twenty percent as international investors began snapping up product and competing with the local market.

 

 

The Role of the Condo

Every good story has a love-to-hate villain, and for urbaneer it’s the ubiquitous box-in-the sky condo that is popping up left right and centre. The Achilles heel of this entire story of this market rests at its feet.

While we still contend that condos that have a unique quality (i.e. properties with a thoughtful space plan, decent vista or in highly coveted locations) are more likely to hold their value by virtue of their rarity on the market, they may see their values dragged down. With an increasing number of these sky-high condo boxes coming for sale, the market remains vulnerable. The challenge is that all those new condos which were sold in presale over the past four years are currently under construction and heading towards completion. Check out this April 2013 Toronto Life piece for some sobering stats.

Although there was a 29.1 percent decline in new low-rise and high-rise sales in 2012, the combined total was still a phenomenal 32,842 units. Interestingly, the prices for these units increased 2 percent while the size of said units shrunk 16 percent to around 800 square feet on average. Yes, a crackerjack box is now smaller and costs more! Although new home sales declined in 2012, the Greater Toronto Area has a record number of high-rise units under construction.

In 2012, 237 high-rise projects with units totaling 60,713 were under construction of which 88 percent were sold as of December 31st. Compare that with 308 low-rise projects with a total of 42,934 units under construction, of which 82 percent are sold. Despite that, only 10,575 high-rise units were delivered throughout the year, down 26 percent from 2011 and the lowest in the past decade. Note that means there are six times the number of units to be delivered in our near future than were completed in 2012.

A word of caution. Although 88 percent of to-be-built high rise units are under contract, that doesn’t necessarily translate into certain sales. There is a lot of speculation with the intention of assigning the finished unit in advance of condominium registration. Be wary. Click HERE for a May 6th Toronto Star article that documents the 55 percent decline for new condominium sales in the first quarter of this year, along with other sobering stats.

The resale market is also having its challenges. The Toronto Real Estate Board just released its quarterly condo report, in which condo re-sales throughout the GTA fell by 17 percent in the first quarter, year-over-year. Prices for condos also registered a modest decrease, so the million-dollar question is whether the supply of condominiums matches the demand of the market to keep prices stable or if they may be heading for a precipitous drop or a gentle decline.  Click HERE to see TREB’s latest resale statistics and HERE for their latest condo report.

The mitigating factor is whether the investors who have fueled the condominium market keep them as investments, or decide to simultaneously liquidate in order to garner a smaller profit or potentially break even.

While the Spring market has been unseasonably chilly and wet, causing many sellers to delay listing their property, the past couple of weeks did see a bit of momentum in the market which prompted the media to report on the slight uptick in sales and values. However, this doesn’t wholly alleviate urbaneer’s concerns. The key here is that if you’re going to purchase a condominium, buy something special which you’re prepared to hold for the long term. And DON’T buy a suite in a super high-rise. As glamorous as these tall towers are presented – click HERE for the next proposed 70-storey tower – do not forget that the value of any condominium high-rise suite is dependent on the most desperate of Sellers. If you’re in a 50-storey 400-unit condominium that has 200 one-bedroom suites similar to yours, the ability for it to increase in value is essentially at the whim of the most desperate of sellers owning any unit similar to yours. Our advice? Buy a condominium which is the least likely space to be replicated in the neighbourhood you’re buying in. For example, a vintage loft condominium in a great neighbourhood will hold its value better than a unit in one of the multiple high-rise towers in CityPlace.

 

Our Thoughts On The Dynamics of Demand

As realtors operating within the original City of Toronto, urbaneer believes the demand for central freehold housing will continue to outstrip the supply for the balance of the year, given there are very few new freehold properties being built. Our very livable city of neighbourhoods with its efficient transportation system is popular with urban professionals and young families, setting the tone for the continuing gentrification of former working class neighbourhoods. In a city that is destined to keep growing, a freehold property in a demand location will remain a solid long term investment.

However, this does not mean that homeowners, of any type, will be insulated from a market adjustment and caution should be the order of the day. Toronto could see property values freeze, or increase in value in very small increments. Given the hefty costs associated with buying and selling property (especially with Toronto’s massive double-land transfer taxes), people aren’t going to move with the same frequency as they used too. Torontonians may have to limit the frequency by which they climb the property ladder, and instead opt for the good old-fashioned buy and hold approach.

With economists offering sobering thoughts about the end of a boom cycle, where records were set both for the volume of real estate traded and the price point attained, it does not mean we’re going to all suffer through a significant crash ‘n burn. The ongoing relocation of multiple generations will continue to occur (there are currently three competing generations of Torontonians by birth in the 20-50 year demographic keen to raise families in the original City of Toronto), while immigration is keeping the city growing, singles will buy affordable condos, and professionals seeking the convenience of our pro-urban lifestyle will demand quality urban housing.

What economists are referring to in their dire predictions, is really the push and pull of a market cycle. The potential problem is that the valleys that face the market are inversely proportional to the size of the swell of the market upturn. Click HERE to see a May 5th article in The International News which reflects the wonkiness we’re in.

No question, there is a shift in the dynamics of the housing market, where it will take longer for property to sell, and for prices to rise. Buyers will be more conservative in their negotiation, more prudent in their due diligence, and less willing to plunge into a market that no longer guarantees a quick flip and guaranteed return should life circumstances change. Without a doubt, Sellers will have to be realistic in their expectations, acknowledge that it may take longer to find that ‘right’ Buyer and, if they’re protecting their asset with caution, choose a seasoned realtor who has experience operating in these changing market conditions. Like us!

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 first installment of our Spring/Summer 2013 forecast on the downtown freehold housing market? Click HERE to read our point of view.

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Sincerely,

~ Steven and the urbaneer team

One of Bosley’s Top Ten Realtors

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