BLOGGING FOR CONDOS

My last rant – I mean blog on mortgages pointed out the fact that the Federal Government had introduced new rules for CMHC Mortgages. One of the new rules coming into force for April 19 was that borrowers had to qualify at the five year mortgage rate, regardless of the term of the mortgage for which they were applying. But no one knew which five year rate to use. Of course we all surmised that this was just another make work project and that the Government would soon establish a ‘posted’ rate for everyone.

Now the Government has established the ‘posted’ rate and it will be announced each Monday. It starts at 5.39%. But the Government rule now states that you may qualify at either the posted rate OR the contract rate if you get a mortgage for a term of five years or more. You can get a five year rate from some lenders at 3.75%. Guess what everyone will do? They will just apply for the five year discounted rate.

Now there will only be a single mortgage term going forward for all buyers with less than 20% down – five years!! In the long run, only lenders with five year money will be able to compete – read banks! We will soon have fewer lenders, fewer choices, and the consumer will get screwed. But at least we know that the Government is looking after our best interests.

Changes announced by the Federal Finance Dept. are intended to ensure that the real estate market does not experience a crash because they fear that the public has overextended themselves in terms of their mortgage commitments. It’s nice to know that a Government that has trouble running its own state of affairs knows more than consumers and lenders.
The best that can be said about these changes is at least the Finance Dept. did not ‘screw up’ the real estate and mortgage markets at a time when they are an important contributor in getting us out of the current recession. When so many markets are underperforming, let’s kill the ones that are doing well! This would only make sense to a government official. Thank goodness the changes will have only a minimum impact on our real estate markets.
But enough of the sarcasm, let’s focus on the changes. The most important one is that buyers must now qualify for a mortgage based on the five year fixed rate, regardless of the type of mortgage being borrowed. The fact that a five year fixed rate can be either a posted rate or a discounted rate with most lenders seems to have escaped the bureaucrat’s keen eyes. As well, different lenders also have different five year rates. I am sure the Government will now come up with a ‘prescribed rate’ and we will have to set up a new department just to research, calculate, and announce changes from time to time! Also overlooked was the fact that lenders currently qualify buyers at their own three year fixed rate. Using discounted rates from a single lender, the difference in qualifying rates from three to five years will be just over 1/2%. When you factor in how much extra income a person will need for a $300,000 mortgage, it will probably amount to an extra $4,000 a year in qualifying income.
The second change involves refinancing an existing property. Now an owner can only refinance up to 90% from 95% in the past. This is not a bad change as owners cannot just keep refinancing to the max to take money out of their property.
The third change involves rental properties whereby a buyer must now put down a 20% minimum down payment. It was unfortunate that the press release referred to these types of buyers as ‘speculators’ rather than investors which just demonstrates the thinking of bureaucrats. Again we are not opposed to this change. Anyone buying a condo to rent out knows that you need at least 25-35% down, just to break-even. Many non-resident investors are buying new condos ‘all cash’. This change may impact those buyers in small market areas where 10% down can generate a positive cash flow from rental properties. It will have no impact in the Toronto condo market.
In closing, let’s be grateful that the Finance Dept. did not increase the down payment from 5% to 10% for buyers, on the mistaken belief that more down means buyers will not default when lenders are qualifying on the basis of income! This change would have killed the ‘first time’ buyer market and that in turn would have put the brakes on the ‘move up’ market because these people would have had no buyers for their property! The end result would have a big real estate crash which was what the Government was trying to avoid in the first place!! What more can we say!

The Competition Bureau has decided that real estate needs more competition and lower fees. They have not said if that will affect service but they are sure that is what consumers want. The proof will be sometime in the future.

The Head of the Competition Bureau has said she wants changes such as those enacted in the U.S. whereby consumers can list for a flat fee and pick the services they want. After two years with this option in play, there has been no noticeable increase in the number of sales being done is this manner, as opposed to a percentage commission rate. My guess is that most people soon realized how hard it is to price, stage, and then promote a property for sale. Then who arranges, screens and is present for the showings. Finally, the seller has to ‘up front’ the fees. That means the consumer pays first even if the property does not sell. Right now the Realtor does all the work and if the property does not sell, they get nothing! I am sure the real estate industry would like to get paid up front too!

My take is that this investigation is simply a publicity exercise, as the Bureau desperately needs any type of conviction. The Competition Bureau which has been maligned in the past for doing little can now take on the role of the good watch dog for consumers. Of course it does not hurt that the Head of the Bureau, being a lawyer by trade, is maybe hoping for more business for her profession too which would be a natural fall out.

SALES COMMENTARY:

September sales on the Toronto Real Estate Board were as forecast – up 28% over September of ’08. Who says Realtors are overly optimistic? Even we were wrong with our September forecast of 7500 units – the final number was 8200! Again condo sales lead the way with year over year increases of 34% in the overall market, over 45% for Downtown condo sales, and 50% on the Etobicoke Waterfront. Look for October sales numbers in the 7500 unit range which will surpass October of last year’s 5100 (when the market started to tank). Comparing to last year is no longer appropriate. We need to look at a number of years. Total sales for 2009 will probably be in the 83,000 range – down from the 2007 record year of 93,000 units but on a par with 2004, 2005, and 2006. Hence 2009 sale levels are very sustainable going forward.

The Downtown condo market is extremely tight. The sale-to-list ratio has moved to over 75% meaning that everything is selling in less than 30 days (the norm is 60-90). Resale condo prices are rising on average at 1% per month. Multiple offers are the norm under $400,000. Some frustrated buyers are returning to the new development condo market which has lagged the resale market. The price gap premium for new has narrowed from over $100 per sf. to less than $50. Part of this rush is the public’s race to beat the HST next June and to capitalize on low mortgage rates which the Bank of Canada will revisit again in June of 2010. The Spring market promises to be hot and will match 2007!

This month we looked at sales at City Centre – 381 Front St. West, known as the Apex. The City Centre Complex is a prime location but represents entry level condo pricing for those who want to walk to work. The first unit we looked at was a one bedroom with den, parking and locker at 675 sf. plus a 25sf. balcony. The same unit sold three times from 2004 at $222,000 to $260,000 in 2007 and then again in June of this year at $302,000. That is $447 per sf. including parking. Another one bedroom sold at the same time for $425 per sf.  as a reference. We then looked at a two bedroom with den, parking and locker at 950 sf. plus balcony. This unit sold for $315,000 in 2006 and then for $410,000 in June of 2009.  That is $431 per sf. It is interesting to note that the price per sf. for smaller versus bigger units has narrowed – just exactly what we forecast a couple of years ago. Also both the one and the two bedroom units are appreciating at a rate of just under 10% per annum. Again a convergence of performance between unit sizes.

RENTAL COMMENTARY:

We are now entering a slower rental market. On average, rental numbers were off by 20%. There were 34 bachelors, 206 one bedroom units, 106 two bedroom units, and only 3 three bedroom units rented. Rental rates continue to inch upwards, on average about $50 per month. The basic one bedroom without parking was renting for $1400 plus, while the most popular unit – a one bedroom with den and parking was going for $1650. Two bedrooms start at $1900 and will go up to $2450 for a den and parking.

The real estate market usually slows by mid October, but not this year. The market under $400,000 is still being dominated by multiple offers. So frustrating that some buyers are moving from resale to the new development market.

With a lack of listings, resale condo prices have started  to increase and the gap between new and resale prices is narrowing – from over $100 per sf. to about $50. What should you do? Buy a resale condo now in expectation that this market will run for at least another year? Buy a new condo at a smaller premium than before and take delivery in three years?

SALES COMMENTARY:

August sales at 8,035 units on the Toronto Real Estate Board were 27% ahead of August numbers for ’08. While sales were down from July this is strictly a seasonal factor. On the condo front, overall sales were up by 26% this August over August ’08; on the Etobicoke Waterfront by 23% and Downtown by an incredible 66%!

Now to dispel the final myth: that this recovery is a ‘false up’ and that the real estate market will turn down again. We said we needed to see September numbers to confirm the trend for the balance of the year. Well we are forecasting September sales at 7500 units which compares to 6400 units in September ’08 and 6900 units for September ’07 (remember the record breaking year)! With low mortgage rates, rising public confidence that the worst of the recession is behind us, and Government economic stimulus programs still to impact the economy (what else is new- Governments are all talk, no action, and always a year behind reality), the economy can only go up from here. It is safe to assume that the real estate market will continue tracking upwards. For owners, the current lack of listings has lead to rising prices but the inventory of listings can change significantly within six months. Now is a great time to sell for investors.

This month we examined three sales at the DNA building at 1 Shaw in King West – the hottest condo area this year. The building is geared to younger buyers and most of the units are smaller. The smallest unit at 645 sf. was sold in June of this year at $290,000 (2% over list price). It previously sold for $228,000 – three years ago. It is a one bedroom without parking but has a locker. A slightly larger unit (660 sf.) with parking but no locker sold for $287,000 in July (3% over list price). It previously sold in 2007 (at the peak of the earlier market) for $267,000. The largest unit, at 935 sf. with two bedrooms, parking and locker, sold for $388,000 (3% under list) in March of ’09. Previously it sold for $370,000 in August of ’06. It is interesting that the smallest unit sold for $450 per sf. whereas the largest sold for only $415 per sf. Compare that to new developments that sell for $500 per ft. and more. Condo prices in this building are rising at 9% per year for the smaller units and about 3% for the bigger units – even taking into account the price correction at the end of 2008.  People who decided to wait have certainly lost and it proves our point once again that ‘you cannot time the market’!

RENTAL COMMENTARY:

August and July are always the busiest months of the year with every one wanting a September 1^st occupancy. August surpassed July with 40 studios, 254 one-bedroom units, and 131 two-bedroom units changing hands Downtown. Prices were also up. Tenants paid $1350 for studios, one- bedrooms went from a low $1350 without parking to a high of $1600 with parking and a den. Two-bedroom units ranged from $2000 without parking to $2250 for parking and a den. It is interesting to note that the premium for a parking spot has moved up from $100 to $150 per month. Finally, investors who are thinking about renting have missed this year’s market! It ended September 1^st. You should be thinking about selling instead.

September sales – 8,200 units compared with 6,500 in September of ‘08 – confirmed that we will enjoy a strong Fall Market. Early indications for October confirm about 7,500 sales versus only 5,100 a year ago in October. No doubt that October last year was the start of the steep down turn in the condo market.

The other trend that people over look is the Seasonality Factor. Historically, sales in October and September are always very close. the drop off occurs in November. But remember that sales levels in these months are usually 35% lower than the peak Spring months of may and June.

So for frustrated buyers who would like to reduce the number of multiple offerr scenerios, your time will come, Try the latter half of November and focus on December.  We have an unusual low number of listings, so sellers can still get into the market and not have to worry about their property sitting there until spring. Not a bad market for all participants.

So when do we see a change? Not much will happen until two shoes drop. First will the Feds raise interest rates as they promised to review next June? Secondly, what will be the impact of the HST? It is coming – in some form for June 30 as well.

But that is a subject for another blog.

August numbers are out from the Toronto Real Estate Board. Sales were just over 8,000 units -27% higher than August ‘08. For September, we are forecasting 7,500+ units. Compare that to 6400 units in September ‘08 and 6,900 units in September ‘07 ( the record sales year on TREB).

There is no reason to expect this market to back off. Affordability is at a five year low and the economy is starting to improve along with consumer confidence. Listings are still in short supply and while prices have increased from February lows, we have not seen any speculative price increases that would suggest any type of housing/condo bubble that would lead to a correction in the near term.

All good news but we have been in this business long enough to not get complacent. The key to success in this business is to track the real estate market on an ongoing basis and to keep on top of even the slightest changes. That’s where most of the experts tend to fall down and which leads them to their biggest mistakes.

SALES COMMENTARY:

July was another record breaking month for the Toronto Real Estate Board. Residential sales were 9,967 units – up 28% over ’08 but down 9% from the peak month this year which was June. On the condo side, sales were up 24% over July ’08. In South Etobicoke, condo sales were ahead by 5%, whereas Downtown condo sales were up by 33%. More significantly, Downtown condo sales matched June’s numbers. August numbers will be lower than July’s – in the 8,000 unit range which will be 25% ahead of August of ’08. But we need to see September numbers before we can accurately gage the rest of the year.

We know that low interest rates and Generation X and Y are driving this market. But what is fuelling strong prices is the lack of listing inventory which has caught most of us by surprise. New listings continue to trend down – 18% lower this July, than in July of ’08. Active listings, the pool for buyers to select from, is 36% lower than last year! When you examine the sale-to-list ratio for condos Downtown, it is currently over 80% (remember a balanced market is 25-35%) and in South Etobicoke it is just over 50%. This is certainly a window for sellers to move up and for investors to sell out. Experts seem convinced that demand (buyers) will drop off later this year. Their rationale is not based on any economic factors but just that buyers have to run out at some time. Certainly seasonality will slow this market but our analysis shows that condo buyers just don’t work in area ‘416’, as most people assume. The number of younger buyers who work in ‘905’ and who insist in living Downtown is huge and is growing!

This month we looked at sales at Mystic Point and The Tides building in South Etobicoke. This is the perfect building for young people – lower prices and highway access for those who work in ‘905’. We looked at three different-sized units to track the price trend from the market peak in 2007 down to the trough in late 2008 and then the market rebound in 2009. As we have reported before, small units were not impacted in 2008, whereas larger units definitely dropped in price and then rebounded. The smallest unit we looked at was a jr. one-bedroom with parking which sold in 2007 for $187,000 and then sold again in July of this year for $207,000. A two-bedroom with one bath, at 800 sq.ft., sold in 2008 for $264,000 and again in May of this year for $277,000. The biggest unit with the best view – two bedrooms with two baths and parking, sold initially for $324,000 in 2007 and was sold again in May of this year for just $313,500. The smallest unit is selling for $400 per sq.ft., while the bigger units are going for $350 per sq.ft. which is a discount to the Downtown market of about $50-75 per sq.ft. Prices at these levels are definitely sustainable going forward.

RENTAL COMMENTARY:

The rental market remains strong and very tight. 245 one-bedroom units were leased Downtown, from a low of $1400 on average without parking to a high of $1700 for a one plus one with parking. This was the biggest month for two bedroom rentals this year with 138 units changing hands. Prices ranged from $2000 – 2200. There are also more bachelors on the market with prices averaging $1250 to $1350 for parking. An interesting trend is that units with parking are staying on the market for 15 days while those without are staying on the market for 25-30 days before renting.

All year we have been looking at sales statistics in comparison to last year – 2008. With July sales 28% higher than the same month last year, and year-to date- sales almost dead even, it is a certainty that this year’s sales will outperform 2008 by year end. Last year the market started to collapse by the end of September and the signs were already telling by that time. We had 26,000 active listings and we added 15,000 new listings that July.