CAN AMORTIZATION HELP RISING CONDO PRICES?

Condos in Toronto are also being marketed as the affordable housing alternative. But prices are now rising for condos at the same rate as houses. So how can first buyers crack the market?

Consider a mortgage with a 25 year amortization rate. (Amortization is the time it takes to pay off a loan with the same fixed payment and interest rate.) The monthly payments for a $200,000 mortgage are $1279.61 at a 6% interest rate. Last year, the Federal Government allowed lenders to increase the maximum amortization from 25 to 40 years. That means if the lender allows a buyer to spread these payments over 40 years, the monthly payment would drop to $1090.18. A saving of $189 a month. That's good news for people with low incomes trying to qualify for home ownership. At the same time, this extended period will mean that buyers will also end up with thousands of dollars in extra interest payments.

Is this the end to extended amortization periods? Why not 50 years? In Spain, you can now get mortgages with 100 year amortizations. We all know that people don't live long enough to pay off that kind of mortage. Now we have new meaning to the word 'inheritance'! Not only does the next generation inherit the property but they also inherit the debt!

Generally, Canadians are a conservative bunch, but it is just a matter of time before we have the 'never pay it off' mortgage.

ONE BLOOR CONDO PROJECT DESERVES COMMENT

The recent stampede and frenzy over the new condo project at Bloor and Yonge last week raises serious concerns over the future of the condo market. The project will not reach market until 2011 at the earliest, so there is plenty of time for more rationale behavior.
The project was originally offered at prices of $700-$1000 per sq. ft. Packages were available to agents for a couple of weeks before the supposed VIP Opening. Agents and their designates lined up for over a week. On the day of the Opening, prices mysteriously doubled - $1200-1500 became the norm. And the building, all 80 floors were almost sold out.
But back to the reality of today’s condo market where resale units sell for $400-450 per sq. ft. The public is prepared to pay a premium for new projects, both because it is new and because they think prices will increase before they have to take title to their unit. The market has priced in about a $75 premium for this. Prime properties and locations can also command another $100 per sq. ft. premium. So at best this project should be priced at $625 per sq.ft. Now if you think prices will sky rocket from now until 2011, you might agree to pay a little more. Even if prices get to $1,000 per sq.ft. in 2011, (which I think is unlikely given that this is Toronto and not some world class city), these buyers could be looking at a loss of some 20% minimum.
In the interest of full disclosure, our Company did not sell a single unit in this project to our clients. Following the official Opening, we have been offered a number of units by people trying to ‘flip’ the units they bought last week. It is interesting to note that buyers have a 10-day recession period after their purchase whereby they can get out of the deal. It will be interesting to find out how many people cancel.
Will the condo market increase in price over the next twelve months? Yes. Will people who paid $1200 + be able to flip their units for a profit on the day they take title to their unit. Probably not. When people think with their feet instead of their head, you can bet that some sort of market correction is inevitable!