Hello? Is any one there? We have some extremely affordable condominiums for sale!

Toronto is in the midst of a building boom, with 147 high-rises and skyscrapers under construction. This is twice the number of condos under construction in New York City, and more than all the major U.S. cities combined. Yet back in July, when we posted our Summer Forecast, we warned that if cracks were going to appear in the hot Toronto housing market, they would first show themselves in the condominium market. We went a step further to say that this will occur first in the high-rise point tower condo market in locations attractive to international and local investors. Click HERE to read that forecast.

More recently (6 weeks ago), we posted one of our Tales From The Trenches which explored the beginnings of a wonky market. Click HERE to read some of the signals we experienced that indicated a market change.

Investors, who have comprised upwards of 95 percent of new condominium unit sales in the City, have all but dropped out of the market. An article posted this week in Canadian Real Estate Magazine cites a 30-40 percent drop in sales to investors in the recent months. In today’s Huffington Post, Urbanation cites a 47.5 percent drop in new condo sales this past September from a year ago. Click HERE for an October 23rd, 2012 video post from Global News on the cooling market. This kind of media coverage is going to remain for the balance of the year, which will certainly influence the public’s perception of the market.

From the trenches, over the past six weeks investors have all but vanished. They may be looking at real estate but they’re certainly not buying much of it.

To compound matters, back on July 9th, 2012 Canada’s Finance Minister Jim Flaherty introduced the fourth set of mortgage financing changes over four years to cool the super-hot real estate market. The changes included a reduction in maximum amortization from 30 years to 25 years, a reduction of the amount of equity homeowners can take out of their homes for refinance (from 85% down to 80%), the removal of CMHC Insurance backing on homes over $1million, and a reduction in the debt service ratios that are used as the basis of lending qualification and amount criteria for Buyers.

What this move effectively did was impact the ability for first time buyers to get into the market. Click HERE to read our more comprehensive analysis of why this is the case.

With investors vanishing and first time buyers being limited by affordability (exacerbated by the media frenzy spooking everyone), the number of active condominium buyers out there has drastically diminished in a very short period of time. It’s prompted motivated sellers to slash their prices upwards of ten to twenty percent garnering a sale. In the past week we’re seeing Sellers bring their condominiums to market at list prices now matching 2009 values. In other words, three years of real estate gains have been wiped out in the past seven days by motivated sellers scrambling to unload their ‘affordable’ condominiums. What’s interesting, is that this swift transition has not yet filtered into the freehold housing market, though we can anticipate it will begin to impact all segments of the market.

Why?

A ten to twenty percent decrease in values will prevent a large number of existing homeowners from selling and buying up the property ladder because they will have not built up enough equity to cover both the expenses associated with making a move, in addition to making the profit necessary to climb up the property ladder. Remember, a healthy market requires the on-going filtering of housing stock to go up and down at all price points in order to remain balanced. The moment one segment of the market suffers, the entire market faces a transition.

My fingers are crossed this lull is merely transitional while the market collectively adjusts to the drop in values. However, at the moment, the Autumn condominium market feel more like a ghost town with tumbleweeds relative to the intensity of past years.

I don’t want to come across as dire, but if you’re an owner of a condominium it’s important you recognize that your place is not worth what it was in the Spring of this year. Count on a minimum ten percent decrease in Spring market values in order to simply attract attention and get Buyers to cross your threshold. After years of it being a Seller’s market, be prepared to negotiate with your Buyer. Some of them are seeking revenge for years of Seller torment.

There’s one factor that may stem an on-going drop in condominium values. The condo market serves as the main supply of rental housing in Toronto, and while there is a condo boom going on, the pace by which the buildings are being finished (typically around four years from the point of the original sales launch) can’t keep up with the rental demand. In fact, we’re seeing the return of ‘Key Money’, where prospective tenants have to either pay a ‘finder’s fee’ to a property manager to secure an apartment, or offer more than the monthly rent to win the lease against other tenants. Click HERE for an article in today’s Toronto Star which provides more insight on the supply imbalance for rental accommodations.

Certainly, those condominium owners who are unwilling to sell their place and incur a loss, will be able to rent their unit and nearly? cover their costs. We may see, as early as January, large numbers of Sellers pull their properties off the market and either remain occupying them or alternatively, put their suite into the rental pool. This, in itself, could potentially help re-balance the over supply in the market as it stands now. And for those seeking a long term investment, negotiating on a Triple AAA condo in a Triple AAA location over the next couple of months may ultimately serve you well.

May we suggest some?

Stay tuned for more Tales From The Real Estate Trenches.

~ Steven

Real Estate
Tales From The Real Estate Trenches