April sales marked the start of the Spring Market – about six weeks later than last year. And for the first time, the gap between monthly sales for 2012 versus 2013 narrowed significantly. As reported by the Toronto Real Estate Board, overall sales were only 2% lower than April of 2012. For condos, sales were 5% lower than for April of the previous year. But Downtown and on the Etobicoke Waterfront, condo sales were only 2.4% lower this April. As we predicted, improving weather had a dramatic impact on sales.

At the same time, new listings in April were up considerably from the same month a year ago – 11%. For condos, the increase in new listings was 14%. For Downtown condos, the number was just 10% but on the Etobicoke Waterfront it was 40% higher! While the so-called experts keep saying that the market weakness is centred on Downtown condos, the reality is that 905 and the Etobicoke markets are weaker. However the increase in listings will keep prices in check. Days-on-market for properties selling have also increased slightly from the same month a year ago. For Toronto, the days figure was 23 versus 21. For the Downtown condo market it was 31 days as compared to 27 last April.

Now sales results for the first two weeks of May are out. Overall sales are down 9.7% from the first two weeks of last year. For condos, sales are down by 13%. So how does that relate to the improving sales numbers that we reported for April? The answer is that May was the peak sales month for 2012. By June sales had declined by 13.5% from May, and for July the decline was 19% from June. For 2013, we see the peak sales month of the year being June, and with a summer drop off in sales of only about 10%.

While house prices and condo prices continue to edge up on an average price basis, we continue to believe that the most accurate way to measure price changes is to track individual properties over time. This month we looked at sales at Newport Beach on the Etobicoke Waterfront.  The building is under ten years old and enjoys great water and city views.  The first unit tracked was a two bedroom with two baths, two balconies, parking and locker at 1150 sf. It sold in February of this year for $375,000 or only $326/sf – partially because it faced northeast. This same unit first sold in 2006 for $309,000 and three years later in 2009 for just $310,000! Over 6 ½ years, the unit appreciated by just 3% per year. The second unit we looked at was a one bedroom with parking and locker that faced southeast, with a slightly better view. It sold late last year for $305,000 or $420/sf. The same unit also sold two previous times – in 2005 for $225,000 and then again for $269,000 in 2007. When you do the math that is a 4% annual appreciation rate over 7 years. Compared to Downtown condos, these prices are cheap. Condo fees at Newport Beach, which include all utilities, are just over 60 cents per month. From our perspective, prices for these condos can only go up when you see new developments on the Etobicoke Waterfront priced at $500/sf.

RENTAL COMMENTARY:

The media is now focused on rental prices that are going up too quickly. Again they are about six months too late. Rental prices accelerated last fall – rising by over $200/month. Now they have levelled off – even in this spring market when rental demand is peaking. What happened? Two recent trends have emerged: first, a lot of renters have figured out that it is better to buy. (starting in April, downtown condo sales picked up considerably); and secondly, changes in how Revenue Canada are dealing with Assignment condo sales have made it more advantageous for investors to rent their units for at least a year rather than flipping them. Hence more condos were listed for rent. In April studios were renting for just under $1400 on average. About 100 more one bedroom units – almost 400 in total were rented in April than March. Bottom end one bedroom units start at $1525 per month without parking. The most popular rental, the one bedroom plus den and parking, averaged $1800 – down $75 per month from the peak in November. Two bedroom units – over 250 were leased in April – also saw some moderation in rents. The basic two bedroom without parking averaged $2100 and a two bedroom with den and parking topped out at $2800. Again these rents are $100 less per month than the earlier peak, although they are still some $150 higher than this time a year ago. It will be interesting to see how rental rates perform for September 1^st leases, usually the peak of the market.

SALES COMMENTARY:

March was the second consecutive month this year where sales were considerably lower than the same month in 2012. As reported by the Toronto Real Estate Board, overall sales were down by 17% in March. Total condo sales were down by 20%, while downtown core condos were down by 16%. As we reported last month, the poor weather in February and now this March had a major impact on sales. The so called experts have dismissed the weather claims, but when you are ‘on the street’ and see appointment cancellations, and people delaying the search process; you know better. While the market has now been soft since last summer, prices have yet to decline as the experts have been predicting. Average prices are up 4% over this time a year ago. Average condo prices in the 416 area – the one segment that has generated the most concern are up by 2%. So how do you explain that?

Looking specifically at the downtown core ‘active’ listings continue to rise – up 16% from March of 2012. However ‘new’ listings for March were up only 5% from March of last year. For those condos that are selling, they are selling at 98% of list price and on average in 31 days. Last year the numbers were 99% of list and 27 days! Not much of a difference. What that tells us is that listings priced at market are selling, and that we have an overhang of listings with sellers who are unrealistic about price.

TREB sales results for the first two weeks of April are out. The weather is a little better – not the spring temps from last year – and surprise! Overall sales are only 1% lower than for the same period last year. Looking at condos in the 416 area, sales were off by only 4% from last year and the average price is 5% higher. Are we heading for a ‘lagged’ spring market? In 2012 monthly sales peaked in May and then dropped off significantly by July. This year we are looking for sales to peak in June with a much stronger summer selling season than last year. Let us be the first to predict that monthly sales will exceed those in 2012 by July – August at the latest! When will the other so called experts figure out the market change? They probably will read the tea leaves by September and most buyers looking for the market bottom will have missed it again.

Trying to interpret prices in this market is difficult. This month we examined sales at the Festival Tower at 80 John St. Having the Toronto International Film Festival head quartered in the building does add extra sizzle to prices. The Developer first began selling units in 2007 at $600 -700 per sf. and the project was completed for occupancy in 2011. We decided to trace the history of a single unit which was sold first as an assignment in June of 2011. The unit, on a high floor, is a one bedroom plus den with 619 sf. It has a locker, no parking, plus a 128 sf balcony, with significant upgrades. It sold for $450,000 or $727/sf. The same unit was sold again in January of this year by the mortgage lender as a Power of Sale – as is; meaning that it was a slightly below market price. The price was $402,000 or $649/sf. Currently, there are 9 other units for sale out of 373 in the building – none of which are Power of Sales.  The range of list prices for similar units is $700-720 per sf. The point we have been making over the last twelve months is that the resale condo market is very stable in the $500 -550/sf range downtown. If anything prices have edged up about 2-3%. Premium buildings have seen their prices come down from upwards of a $1,000 per sf to the $700+ range.

RENTAL COMMENTARY:

Currently 24% of all condos in the GTA are being rented by investors as opposed to being lived in by end users. The current vacancy rate is 1%. In the downtown core, almost 600 units were leased in March. Rental prices were unchanged. Studios or bachelor units averaged $1400/mo. One bedroom units start at $1500 without parking or den and average up to $1900 for a one bedroom that includes parking and den. Two bedroom units start at $2200 and go up to $3,000 per month. There were twelve three bedroom units leased in March at an average price of over $4,000 per month. Average days to lease ranged from 10 days for one bedroom units, to 16 days for two bedroom units, and up to 50 days for the three bedroom units.

The second point to make is that 80% of residential sales take place for personal or family reasons, and not economic reasons. Experts sitting in some small office think that all decisions are based on income. When an Executor phones to tell me that Grandma’s dead; they never ask me about the market, should they hold off selling for a better price, or should they rent it out for a year. No they just want to sell it!

Sales for the first three months of 2013 on TREB are down 15% from 2012. We know that by August, at the latest, monthly sales will be running 10-15% higher in 2013 than in 2012. And by the end of the year sales will be equal to 2012. How do we know? In a previous Blog from March 15, we tracked sales per 100,000 people in the GTA from 2001. Sales in 2012 were the LOWEST since 2001. How much lower can we go with the population increasing every year!

Every year people need to move. We just don’t know when they will be moving – but they will! That is real estate.

February sales results were at best weak, in comparison to January’s promising start to the year. Overall sales on the Toronto Real Estate Board were down 15% from February of last year. All condo sales were worse – down 20% from a year ago. The bad weather had a lot to do with the poor sales results. Last winter we had no snow and this winter in February we had several storms. That means buyers would rather ‘hunker down’ than go out to view properties. Most experts predicting a market correction don’t buy this argument. But how do you explain that new listings for February (from sellers) were also down 12% from February of last year?

The Downtown condo market continues to be the hardest hit in terms of sales. Sales in February were off by 30%. Of some consolation, new listings for the month were also 13% lower than for February of 2012. Do condo buyers also not want to venture out in the snow? No! Condo rentals downtown for February exceeded condo sales by 82%! In a normal sales market it is the other way around – sales are usually 50% greater than rentals. The question is not whether there are enough people to live in condos downtown (demand) but whether people want to buy or rent long term?

If weather (say seasonality) is such a big part of the market, March numbers are more encouraging. For the first two weeks of March, overall sales were down by 11% from the same period in 2012. Condo sales were also down, but by only 10%. And the temperatures this year were in the zero range versus 20 degree Celsius last year! While we are not a supporter of average prices, the average condo price this year for Toronto is 2% higher than a year ago – and we know that the average size of a condo is shrinking! So where are these big price drops?

In this Report, we examined sales at the Vu condos, and specifically 112 George St. This is a newer building, registered in 2010, and located at the corner of Jarvis and Adelaide St. East. It is close to the St. Lawrence Market and business core. The first unit we looked at was a one bedroom with den, parking, and locker at 658 sf. It sold in January of 2010 for $335,000. The same unit sold in March of 2012 for $ 380,000 – at full list price. That works out to $575/sf and a price increase of 13% in two years. The second unit, a small two bedroom, two bath with parking and locker also sold in October of 2010 for $388,000. At 795 sf, it sold again in November of 2012 for $400,000 or $505/sf. While this unit was only on the second floor, the primary difference in price per sf was the timing of the sale in 2012. Prices peaked in the spring and declined by about 5% by year end. So are prices still dropping in this building? Currently there are five units for sale out of 350 units – 3 of them have been listed for just a week. Two units on lower floors, also with parking, are priced at $505/sf and $525/sf. A third unit on a high floor with unobstructed 180 degree views is priced at $650/sf. Our opinion is that prices are not going any lower in this building.

RENTAL COMMENTARY:

February is usually the slowest rental month of the year but rental numbers matched those of January, and as stated above, exceeded sales by 82%. Rental rates for one bedroom units remained unchanged from the previous month, ranging up to $1900 which includes a den and parking. Two bedroom units continue to increase in price. They start at $2250 without parking and can go as high as $3,000 per month with a den and parking included. How tight is the market? The sale to list price ratio is between 99 and 100%, depending on the unit size. In terms of days on market to rent, the average is 14-20 days. In comparison, the average for sales is 28 days. If you think the rental market is tight right now, wait until the peak rental period of May to September!

We can be fairly safe in predicting that there will be no drop off in sales, and that going forward, sales will actually begin to increase. The proof is in the three rows below. In order they are: calendar years, number of annual sales on TREB, GTA population in ’000, and the final row is sales per 100,000 people.

2001        2006         2007           2011                 2012

5,081       5,555         5,596          6,054               6,154

67,612     83,084       93,193       89,096             85,540

13.31       14.96          16.65         14.72                13.89

1) Population for 2001, 2006, and 2011 are from Stats Can Census. Population for 2007 and 2012 are Stats Can estimates.
2) TREB sales in 2007 were an ‘all time’ record

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SALES COMMENTARY:

January results are out from the Toronto Real Estate Board and we have yet to ‘Crash and Burn’ as MacLean’s Magazine and other predict. Sales were only 1.3% lower than January of 2012. Yes, new listings were up and overall condo sales were down in January over last January by 5.1%. But overall sales in January were higher than in December which was a reversal from last year where December sales were actu­­ally higher than in January of 2012.

Looking at the downtown condo market – the supposed epicentre of the coming Canadian market crash, condo sales were down by 7.8% compared to January of last year. That compares more favourably than the 20 to 30% monthly declines­ on a year over year basis experienced in the fall market. Listings were also up by 11.2%. While naysayers will jump on a sales-to-listing ratio of 19% this January – it was only 22% a year ago. While condo sales on the Etobicoke Waterfront in January matched those of a year ago, the number of active listings doubled as registration took place for both the Nautilus and Beyond the Sea condo projects.  While the first two weeks of February produced disappointing results, sales were off by 14.4% from the same two weeks of 2012, we can chalk most of that up to a difference in the winter weather. House hunting and buying is an easy activity that can be postponed for a week or two. So let’s wait for March and the spring market before we pass judgment on the condo market.

What we can tell you is that there are plenty of buyers in the market right now. The problem or challenge is that these buyers expect a price discount from the sale prices of last summer. On the other hand, sellers still expect to get the same prices as last year and are not accepting anything less. Who will be the first to blink? ­­­

This month we examined sales at 18 Yorkville (at Yonge), a condo building in the priciest area of downtown Toronto. The first unit we tracked was a one bedroom with parking and locker at just 546 sf. With hardwood floors and 9 and . ceilings, it has curb appeal. It sold in April of last year at $437,000 in just 21 days. The price just over $800/sf. The same unit sold first in 2005 as new at $277,000 and then again for $410,000 in 2010. Hence most of the price appreciation happened before the Financial Crisis of 2008/2009. In the last two years the unit has only appreciated by just over 3% per year. The second unit we looked at was a two bedroom, two bath unit with a locker and two parking spots. It also sold in 2012 for $685,000. The unit is 803 sf and when you eliminate the second parking spot, the price was $750/sf. The very same unit sold in 2009 for $588,000 for a price gain of 5% per year. So are prices dropping in this building for 2013? Currently there are only two units for a sale. A one bedroom is listed for $449,000 without parking, or $750/sf. A small two bedroom is listed at $615,000 with a single parking spot, or $800/sf. If you expect sales to take place at 3% below list price, then prices in this building have softened slightly but are still over $700/sf!!

RENTAL COMMENTARY:

Rental volumes were strong with 350 one bedroom units and 175 two bedroom units being leased downtown in January. A sign that demand for downtown living remains high and that many still prefer to rent at this time.  Rental prices remain unchanged from the levels reached in late fall. Usually the winter produces the lowest price point of the year.  Studios rent from just over $1400 on average. A basic one bedroom without parking averages just under $1700. The one bedroom with den and parking will cost $1900. Two bedrooms start at $2200 and can go up to $2900 with a den and parking on average. Three bedrooms, if you can find one, will average over $4,000 per month. It will be interesting to see how the peak of the rental market unfolds in the May to September period.

Secondly, there are a lot of condo listings but not a lot of ‘good’ listings. When they are ‘good’, they sell in days. So what constitutes a ‘good’ listing? As always it is value which translates into the right listing price which stimulates offers.

For buyers today, the right listing price is something less than the selling price for condos last summer. They want a discount and the media has told them, that is what they should expect.

On the other hand, sellers still want to list their properties at the same price as last summer. They don’t see any need to lower their list price and most are not desperate to sell.

We all know that most properties sell for 97-99% of list price. A buyer is usually prepared to offer at 95% of list and go from there. If the list price is perceived to be too high, then the buyer does not even make the first offer.

The spring market for condos will be active but at what prices? Who will blink first? Will buyers hold out to get discounts from last summer’s prices or will they yield and pay the same prices? Will sellers hold firm on their list price or will they reduce them by 3-5% to get the offer process rolling?

It will be interesting to see who wins.

In reviewing the 2012 condo market, sales were strong for the first four months, stalled, and then recorded month over month sales declines of 20-30% every month over the last half of the year as compared to 2011. For the first four months of 2013, condo sales will still be lower than for the same month in 2012. Most experts will come to the conclusion that the market is still going down! But the true test is to track the monthly sales differential. Is the decline less than 20%? Is the percentage difference shrinking each month? By August of this year, monthly sales will again be running ahead of 2012 and then the media will get on the band wagon and tout a market rebound. But the turnaround will have started much sooner. And buyers who wait until then will have missed their market chance.

The first test of a market turnaround will come with the January sales results. Two things to look for: are January sales higher than December? When you look at 2012, January sales were actually lower than December of 2011. Secondly, what is the percentage difference between January of 2013 versus January of 2012?

Last year we had a mild winter and the spring market arrived early – it started at the end of January. This year the weather was again mild for the first half but has turned decidedly snowier and colder. What we do know about buyers is that they will postpone viewings and will postpone offers, depending on the weather. So that too will impact January sales in 2013.

Our 2013 Market Forecast called for the current MARKET PAUSE NOT CORRECTION to end my March. The signals should be apparent by then for those who truly analyze the market.

SALES COMMENTARY:

Most forecasters avoid reviewing their calls from the previous year. Not us! We called for 90,000 resales on the Toronto Real Estate Board, and we will end the year with 86,000. We forecast condo sales to be 10% higher when in actual fact they were off by 16%; with the biggest impact occurring over the latter half of the year. We expected condo prices to be flat in the $500-550/sqft range. Over the year, prices rose slightly and then declined to end the year flat to 3% lower.  In the New Home or Pre- Construction Market, prices at $700-800/sqft were unsustainable as we predicted. This Market is now in the $550-650 range, depending on location. We forecast rental rates to increase by $75 across the board and that the basic one bedroom without parking would increase to $1600 – it is now closer to $1700.

In looking back, we were correct with our economic forecasts (growing employment and low interest rates) but missed the orchestrated rule changes at CMHC which impacted the market and which led to more media hype of an impending market correction. The result was that many potential buyers moved to the sidelines.

So what was 2012 – the start of a Market Correction or a Market Pause?

What do we need for a Market Correction? First we need to see a ‘price bubble’ – that is usually defined as double digit price increases in three consecutive years. Next we need to see people selling their properties at any price – because rising mortgage arrears, caused by a spike in interest rates or a jump in job losses. Finally we need to see properties located in areas where no one wants to live. Does that sound like the Downtown Toronto market?

What do we need for a Market Pause? It occurs when people become influenced by outside factors but the underlying economic fundamentals do not change. Think back to 9/11? Because terrorist planes crashed into the World Trade Centre, many believed it was not safe to live in high rises. Condo sales declined significantly for 3-4 months. Think back to the SARS epidemic? No one would visit Toronto and no one would look at any property owned by Asians. Again this sales decline lasted for several months. And finally think back to the 2008 Financial Crisis in the U.S.? If U.S. real estate could crash (it was really contained to about seven states), then Canada would follow shortly. This Pause lasted about 8 months.

UNDERSTANDING THE CONDO MARKET IN 2013:

1)      We are currently in a Market Pause! Our best guess is that it will end by March. Why? Humans are very adaptable and our guess is that they will adjust to the new CMHC rules.

2)      All those construction cranes are really a good thing! Many of those cranes are for new office towers. Many companies are relocating back downtown to be closer to the new work force. Young people who live in ‘416’ do not want to work in ‘905’ and smart companies get that.

3)      No matter how many New Home or Pre-Construction sales take place each year, the construction industry can only deliver about 15,000 new condo units each year – a natural bottle neck for supply.

4)      While condo resales were lower in 2012, there were record condo rentals which offset the decline in sales. Young and older people still want to live downtown. With rents continuing to rise, buying will soon be the preferred option again.

5)      Long term, more and more people not only will want to live downtown but will have to, with a crumbling Gardiner Expressway that will be under construction for years and no rapid transit in place for years.

6)      The economic fundamentals remain unchanged – interest rates will remain low with growing employment and income figures for the GTA and downtown Toronto.

7)      With Governor Carney moving to England, do not expect to see more changes to CMHC rules in 2013.

2013 FORECAST BY THE NUMBERS:

1)      TREB sales should match those of 2012. TREB numbers will underperform the first half of the year and outperform over the last six months. Remember the all-time record sales year was in 2007, so how can we go any lower?

2)      Downtown condo sales will rebound by 15% to 2011 levels.

3)      Prices will again remain flat in the condo resale market and will decrease by another $50/sqft in the New Home or Pre-Construction Market. To entice investors back into the market, developers need to keep the premium over resale prices to a maximum of $50/sqft.

4)      Freehold properties downtown under one million dollars (the CMHC cap) will again attract bidding wars and those over one million will sell more slowly and will see price softening.

5)      Expect condo rental prices to increase by another $75/month. At most there will be about 7500 new rental units in 2013 from new condo completions.  This is not enough to keep up with increasing demand and the vacancy rate for condos will remain below 1%.

But the really big change is that CMHC will no longer insure properties valued in excess of one million dollars and this will have a big impact in Toronto and Vancouver. A lot of younger people with big incomes but smaller down payments – 10-15% will be shut out of this market. Will these people settle for properties under a million or will they just not buy?

Already we are seeing a big drop off in sales in the one to one and a half million dollar market. From a statistical point of view, reduced sales at the high end will produce falling average prices as the mix of sales will change over time. With an average detached house price in Toronto of $741,000, we believe that overall sales will be lower – again like Vancouver which has an even higher average detached house price point. Economists will then be quick to point out that the market is showing even more weakness. However these lower sales volumes have been artificially induced and will not translate into ‘actual’ lower prices.

That’s why the CMHC million dollar cap on insured properties will have the biggest impact on sales in Toronto Real Estate Market going into 2013!

1) New condo sales are dominated – how about 100% – by Investors. That’s because Banks insist on 70+% pre sales, before construction. That means someone who buys today will have to wait five years for their unit to be registered. Do you know anyone who knows their living needs five years from now? No. But Investors never intend to live in the unit, and hence it does not matter to them. End Users, on the other hand, will only buy 12-18 months ahead of when they want to move. Don’t like it? Blame the Banks.

2) New condo units are small and getting smaller. When you combine the Ontario and Toronto Land Transfer Taxes, a unit purchased for $300,000 has ONE THIRD the taxes of one purchased for $600,000! That is an extra cost the Investor must pay. Don’t like small units? Blame your Governments.

3) The HST and HST Rebates (given when an Investor rents their unit for a minimum of one year) encourage Investors to buy cheaper and hence smaller units again. The maximum rebate from the Federal Government is reached at $350,000. These rebates are then clawed back to zero at $450,000. For Ontario, the rebates, at 75% of the Provincial portion of the HST are capped at $24,000. At $400,000, an Investor would receive the maximum benefit. As an Investor, would you buy a unit at $300,000 or $600,000? Don’t like it? Again blame your Governments for impacting the market place.

While it is easy to blame Investors for the shortcomings in the new or pre-construction condo market in Toronto, Investors are only reacting to the rules put in place by others. So practice the Canadian way: learn to live with it!

SALES COMMENTARY:

October sales this year on the Toronto Real Estate Board were down 7% from October of 2011. New listings for the month were up 6% over October of last year and the current inventory of ‘active listings’ at just over 20,000 properties is 16% higher than a year ago. This represents about a three month’s supply of listings at current sale rates. In comparison, the U.S. the norm is about six to eight months.

Turning to the condo apartment market, October sales were down by 16% from October of last year. While the condo market is weaker than the house or freehold market, there is a slight improvement from the summer. Downtown, condo sales were 20% lower in October versus 30% declines for September and August. Is that good news? Downtown, ‘active’ condo listings are just over 1600 and that’s a 35% increase over last year at this time. This represents a 4.4 month’s supply.

For the first two weeks of November, overall sales on TREB declined by 17% versus the same period in 2011.  It now appears that the rest of the market is catching up to the slowdown first evidenced in the downtown condo market over the summer. For November, the downtown condo market recorded a decrease of 21% in sales versus the same period of 2011.

But the number one question is: what about prices? And where have prices moved this year? Unfortunately most experts can only reference average prices. Our views are well documented: average prices are not accurate because the mix of sales is always changing over time and you end up comparing apples to oranges. Our approach has always been to take an individual unit and track the sale of this same unit over time – usually a number of years. In this Report, we are taking a different approach. We are going to track the sale of an identical unit over 2012 in order to see how prices have changed during the year. We selected one of the most popular condo buildings, 65 Bremner – Maple Leaf Square.  The unit we selected was a 549 sf – one bedroom + den without parking.  There were seven sales reported for this unit from January to October. The units ranged from floors 16 to 36. As a rough guide, the floor differential is about $500.  The highest sale price recorded was in January at $359,000. It was on a lower floor. The lowest sale prices were in August at $342,000 and $340,000 – both 7 and 9 floors higher than the January sale. The last two sales were $344,000 and $346,000 – the last one being just a single floor higher than the January sale.  Starting at $359,000, we can say that the average price for this type of unit, when adjusted for floor level is now about $345,000 and the bottom was reached in August. This would translate into a price decline of 4% over the year. That is consistent with what we have been reporting in previous Market Reports.

We believe that sales activity will begin to pick up in 2013, so it seems unlikely that prices will decline much further. So people expecting significant price declines may have to wait a few years longer!

RENTAL COMMENTARY:

Last month’s Report received more comments over rental prices than anything else. We can tell you that rental prices were unchanged in October. The rental market is more seasonal than sales and we are entering the slowest period from October to the end of the year. Still over 300 one-bedroom units were leased downtown at an average time on market of just seven days. (These are summer volumes.) Tenants need to have their documents in hand (application, credit bureau, and employment letter) before they view their first property! The one bedroom market starts at $1700 per month. A den and parking on top will bring the number to almost $2,000 a month. And if you want a one-bedroom with two baths instead of one, the average price is now $2200. (The first time we tried to put a value on the second washroom.) The two bedroom market starts at $2300 and can easily go as high as $2700. The question remains: how high will rents go before more people turn back to buying?

The most accurate way to measure the trend in rental prices is to track a specific unit over a period of time such as we do with our sales analysis in our Market Reports. Unfortunately it is almost impossible to do that with rentals and hence we run a statistical analysis of rentals by type each month.

A number of researchers have asked for more information and some rental agencies have accused us of playing with the numbers. Also the number of leases in a single category such as studios can be so small that focusing on the averages for just a single month can be misleading and you have to look at the numbers over several months.

For those who care, here are the actual results that we based are Twitter remarks on.

2012         2011          % Increase

Studio                             1425            1300              10%
1 Bed No Park               1700            1500              13%
1 Bed + Den No Par     1800            1600             13%
1 Bed + Park                  1780           1575               13%
1 Bed + Den + Park      1900         1700               12%
2 Bed No Park               2300         2000              15%
2 Bed + Den No Park   2500           2200            14%
2 Bed + Park                  2500           2200            14%
2 Bed + Den + Park      2700           2500             8%

The sample size of 3 bedroom units is very small and the average rental price varies significantly month to month from $3300 to $4500 depending on the type of units leased in that month.

As we stated in Part I, The Federal Government wants to get the Consumer Debt Ratio to Disposable Income ratio down from a record level of 162%! We say the ratio needs to reflect bad debt only, a new ratio needs to be developed.

To prove our point, let’s consider two individuals, both with disposable income of $80,000 per year. Individual A has $30,000 of credit card debt and rents a condo at $1500 per month. Individual A has a score of just 37% – just the type of person Messrs. Flaherty and Carney and the Feds want in order to get the 162% number down.

Individual B also has a disposable income of $80,000. He bought a condo with 5% down and has a $300,000 mortgage. Individual B’s monthly mortgage payment is $1449 of which $800 goes to the repayment of principal or a forced saving. The problem with Individual B is that his ratio is 375% – not less than 162%!! But this is just the type of person that the Federal Government does not want!

Who would you rather be?? And what conclusions can we draw? Besides stupid, we guess the Government wants a nation of renters. Keep the people poor and dependent.

That’s where good debt versus bad debt comes in. The Government feels that all consumer debt is bad. Our position is that if debt is used to purchase a consumable with no after purchase value, then that debt is bad. Examples would be unpaid debts for holidays, eating out, clothes, and even cars! Good debt is that which produces an income or is used to purchase an asset that will appreciate over time. For example: borrowing money to invest in stocks, a business, and real estate. Why can’t the Government produce a revised number which separates the good from the bad debt?

CMHC already have rules in place to qualify a mortgage borrower. Their income to Gross Debt Service and Total Debt Service needs to be less than 32% GDS and 40% TDS to get a mortgage. There are no income rules to be a Tenant. In fact if a Landlord discriminates against a potential Tenant on the basis of income, the Landlord can be prosecuted! In fact one could argue that a signed lease for a year could be considered as bad debt – just like a car lease payment! You assume an obligation and there is no residual value!

That seems to sum up the foolishness of focusing solely on consumer debt to disposable income as the sole determining factor of the health of the Canadian consumer.

SALES COMMENTARY:

The public media has now concluded that the Toronto Real Estate Market and the downtown condo market in particular are in full market correction. What does that mean? Certainly sales are slowing. In September, the Market was down 21% from September a year ago. All condo sales were off by 29% and downtown the number was 31%. The pundits say that prices are soon to follow in lock step. Currently there is no sign that prices are retreating. So why would prices retreat? Unlike other commodities, most sellers do not keep reducing the price until their property sells. They simply take it off the market. That is why the sale to list ratio is never 100%. The only time real estate prices fall is when people are forced to sell due to job losses or rapidly increasing mortgage rates. While the economy is slow, jobs are still being created in Toronto. And interest rates are not moving upwards for at least the next two years. The end result is that mortgage arrears for homeowners have been unchanged over the last few years (at .7%) and are unlikely to increase.

While the downtown condo market has been the weakest segment of the market since May there are some positive signs. Mid October sales are off by 18% from the same period a year ago versus 30% in the previous two months. Secondly downtown condo rentals are 33% higher this September than September of last year. (Yes TREB put out a rental report for Q3 that showed condo rentals over the whole GTA were up by just 3%. But that is not our market.) When you total sales and rentals for September of 2012 versus sales and rentals for September of 2011, total units are down by just 4%. The fact is people still want to live downtown. The move back to sales will probably take place in time for the spring market. Those buyers trying to get ahead of the market should focus on November to January time lines.

For this Report we looked at sales at the Luna Vista at 25 Capreol Court. This is a two year old building in the City Place complex just west of Spadina. We would describe the building as being in the mid-price range. The first sale we looked at was a two bedroom, two bath unit with parking, locker, and balcony on a high floor. It is 745sf and sold for $410,000 in September. That works out to $550/sf. An identical unit but without locker also sold in September at $380,000 or $510/sf. It was on a lower floor and the price difference is about $1,000 per floor. The high floor unit previously sold in 2010 for $377,000 or an appreciation of 9% over 22 months. The lower floor unit sold in 2011 for $359,000 for a rate of appreciation of 6% over 15months. We also looked at a one bedroom with balcony and locker but no parking on a high floor. It sold for $330,000 or $528/sf. It sold 12 months previously for $325,000 or just a gain of 1.5%.  The concern about appreciating condo prices in the resale market has been greatly exaggerated by the media as these statistics demonstrate. Our Market Reports continue to show a levelling off of resale condo prices which began late 2011.

RENTAL COMMENTARY:

People continue to want to live in downtown Toronto. That trend to downtown is evident in major cities throughout the world – even in cities like Detroit! The end result is that when people decide to rent rather than buy; resale prices level off and rental prices start to climb. Studio condos edged up to $1425 per month on average. Just under 300 one bedroom units were leased in September. The basic one bedroom without parking was listed for $1650 on average but leased for $1700! Adding a den and parking to a one bedroom will bring the average rental price to $1900. The one plus one with parking is now the most popular rental unit. Two bedroom units without parking start at $2300. A two bedroom plus a den and parking now rent for $2700 on average.

For those who have been with us for over a decade, you can recall a number of pauses – this market has not been going up unstopped for the last twelve years. At the start of the twenty first century, there was the Tech Bubble which impacted technology companies and stock brokers, two of the most influential industries for us downtown. Then there was 9/11 and everyone just stopped and watched. People were advised not to buy high rise condos because you could be susceptible to future attacks. Next there was the SARS disease and people would not even come into Toronto, let alone go out and look at condos. Then we had the Financial Crisis of 2008/2009. All of these were over in three to six months.

What do we have today? A media and a Federal Government who believe it is better to rent than to buy. Look at the end result – multiple offers on rentals. What does that tell you?

More and more people want to live in downtown Toronto. That is not going to change. There are also no under lying economic reasons for the market to slow down. We just have to let this play out. The good thing is that young people can only postpone buying decisions for a certain period of time and then they start all over again. For the latest clothes and tech toys, it lasts a few months. From past experience, my guess is that the preference to rent will pass in about six months. Young people always want it now not later.

So what do we do? First Realtors should focus on only those people who need to sell or need to buy RIGHT NOW! Move the ‘tire kickers’ into a ‘contact in the spring’ file. Deal only with people who have to move for non-economic reasons – a change in family size and they cannot wait six months. The only Buyers to focus on are what we call ‘early adapters’. They see the market ahead of the pack. There are plenty of good buys now and prices will decline by at most 5%. ‘In demand’ properties will not decline at all. For these people, they can focus on what they want without the worry of multiple offers. This is also a great time for people who want to move up. The price gap between what they own and what they want to move to is always narrower at times like this. The point to be made is that right now is just the second opportunity for Buyers in the last ten years and it will only last for about six months.

So lets call it like it is: A BUYERS MARKET FOR THE NEXT SIX MONTHS

SALES COMMENTARY:

The sales numbers for August and the first two weeks of September were not what Sellers and Realtors were hoping for. In August, residential sales for the Toronto Real Estate Board were 12% lower than in August of last year. Condo sales were down by 24% and in the downtown market, sales were off by 34% versus August of 2011. For the first two weeks of September the downward trend continued: residential sales were 15% lower than for the same period a year ago, while condo sales were down by 28% and 32% for downtown condos.

This is just the type of news for which the naysayers and media were waiting. The end is near. Falling sales will translate into falling prices within the next few months. It works in other types of markets, why not real estate? Well the peak year for sales on the Toronto Real Estate Board was in 2007. Therefore real estate prices should have been falling over the past five years according to their logic. But the only price correction we experienced was in late 2008 with the worldwide financial crisis which was understandable. That lasted about eight months. Today we are not facing the same levels of uncertainty. Employment continues to improve, albeit slowly, and our low interest rate environment is not going to change for the next two years at least. So where are the affordability issues? Mortgage arrears in Canada are now trending down from 2010 at .4% of all mortgages. For your information, the peak was in 1992 at just over .6%.

So why have condo sales in particular slowed? People still want to live downtown. Condo prices have levelled off while house prices continue to increase. Our guess is that people have been convinced that renting is the better option right now. All markets take a breather and when people come to the realization that the condo market is not going to crash, they will return in record numbers. Our guess is that this period of lower sales – will last into the spring market of 2013.  So today’s market is not bad. In fact it’s a great market for buyers. One of the few times buyers are in control this decade. It’s also a great time for people who want to upgrade. While entry level prices tend to remain fixed in slower markets, higher priced properties usually decrease in value and the price difference to upgrade becomes smaller, making it more affordable to move.

This month we examined sales at 33 Lombard – Spire is a 45 storey glass tower at Church and Adelaide. The first unit was a one-bedroom with a balcony and locker but no parking. It sold in February of this year for $335,000 or $640/sf. The high price is a result of . ceilings and a high floor with great views.  The same unit sold in 2008 for $286,000. That works out to an annual increase of 4%. An identical unit also sold in 2012 for $40,000 more – but it had a parking spot! We then examined two, two-bedroom units. They are identical corner units with two baths, parking, locker, and a large wrap around balcony. Both sold in May of 2012 for $610,000. That’s a price of $695/sf. But if you adjust for the parking spot, the price per sf is almost identical to the one-bedroom. One of the two-bedrooms previously sold in 2011, for $590,000 which is an annual appreciation of just 3%. The other unit sold over three years ago, and over that time frame the annual appreciation was 5%.  The point to be made is that the appreciation of condo units is certainly within a non-speculative range and that the rate of appreciation is slowing. Compare that to annual price increases for detached housing in Toronto which are in the 10% range.  That is where the concern should be focused.

RENTAL COMMENTARY:

While the condo sales market has cooled, the condo rental market remains hot. Multiple offers on rentals have become the norm. Many offers went over list price. The end result was that rents have continued to rise over the year, and at a much higher rate than the increase in real estate prices! This is welcome news for investors and should make renters rethink their options. Studio apartments rents seemed locked in at $1400-1450 on average. Over 360 one-bedroom units were leased downtown in September – 50% higher than normal. The entry point for one bedroom units without parking is now $1650.The price difference for a den is now $200 instead of $100.  A one plus one with parking will now average $1950.  Days-on-market for rentals is just 5 days. Over 200 two-bedroom units were leased in September starting at $2200 without parking. A two plus den with parking will lease for an average of $2650. Five three bedroom units were leased in September at an average of $4200.

So why do the experts recommend renting over buying right now? That’s because renting does have a lower monthly cash outlay. To own this property requires a mortgage payment of $1259 which includes mortgage insurance + condo fees of $375 (higher than most because all utilities are included) + property taxes of $121 = $1755/month; or $155 more per month than to rent!

Now let’s consider what happens after five years. The Renter invests the difference (they never do) but let’s believe they will every month and earns an interest rate of 2% after tax (probably high). After five years the Renter would have accumulated just under $10,000!

What happens to the Buyer? After five years, the Buyer would have repaid $30,850 of principal on the mortgage. If you assume that the property increased in value by 3% per year (the historical average for real estate), the property would then be worth $313,000. The Buyer would then have increased their net worth by $73,850. If the Buyer had borrowed the down payment of $13,500 from family and repaid it, the net gain would still be $60,350. Even if the property never increases in value, the Buyer is still the clear winner!

So where do you want to be? A possible savings of $10,000 from being the Renter or a ‘tax free’ $60,000 in assets from being the Buyer!!

SALES COMMENTARY:

Last month we asked the question: has the Toronto real estate market peaked?  Residential sales for July were 1.5% lower than sales for July of 2011. For the condo market, sales were down 11.7% from the same month last year. The downtown condo market was the weakest of all – down 20% in July and now off 11% on a year-to-date basis from 2011. At the same time, active listings are 16% higher than this time a year ago. For downtown condos, active listings are 27% higher and the sale-to-list ratio has dropped from 26% to 23%. While detached housing is holding steady, it is apparent that the condo sales market has turned. Why? It is not that people do not want to live downtown. Rental activity is at record levels and people are opting to rent rather than buy. For investors who are leasing their units that’s good news. Average rents have increased by $150/month since the start of the year. If rents continue to escalate, these renters will become buyers within the next 12-18 months.

Still, many investors and we believe owner/occupants are waiting for the Assignment Market to proliferate with buying opportunities. What is an Assignment? An Assignment is an agreement to purchase the right to own and usually occupy a condo that is not yet registered, from a seller who originally purchased the unit from the builder. In the past, these sellers bought units from builders and were able to resell the units for considerable profit. Now many of these buyers will be forced to sell at prices that do not include any profit. Why? Resale condo prices have leveled off and prices are no higher than many investors paid for new projects several years ago. Adding to the challenge for these sellers is that Assignments historically sell for 10% less than resale prices, and you begin to see the problem and the opportunity. With new tighter mortgage rules, many investors will not have the option to rent out their units but will be forced to sell, which will add to the downward pressure on prices.

Long term, the condo market remains a sound investment choice. People will continue to want to live downtown – by lifestyle choice and by population growth. Short term market changes present great opportunities for savvy investors and owners who work with agents that specialize in the condo market.

For those people who want to be in the absolute centre of Toronto and walk to everything, we tracked sales at One City Hall (Elizabeth St. just off Bay and opposite the Eaton Centre). We first looked at two one-bedroom units. The first at 560 sf with parking, locker and balcony sold for in July of this year for $352,000 or $628/sf. The same unit sold for $279,500 five years previously. That works out to an annual appreciation of just under 5% per year. The second, one-bedroom unit was 592 sf with locker but no parking and it sold for $345,000 or $582/sf which is more in line with Bay St. prices. So if you apply the same $582/sf to the first unit, the extra value of $26,000 can be attributed to the parking spot! This same unit sold three years previously for $300,000 and it too has appreciated at just less than 5% per year. The only two- bedroom unit with a sales history in the building sold a year ago for $529,000. This unit also has a den, two baths, parking and locker. At 1044sf, it sold for $510/sf. The same unit sold in 2007 for $471,900 which represents just a 3% annual price gain. It’s hard to understand from this analysis what the Federal Government is trying to achieve with more restrictive lending rules aimed at slowing sales and prices in the condo market.

RENTAL COMMENTARY:

As noted above, the rental market is extremely tight with rising rents and rental volumes. While studio rents remained fixed at $1400 per month on average, the entry level for one-bedroom units – no den and no parking is now $1600! The high end of the one-bedroom market (parking plus den) is now $1850 on average. Over 550 one-bedroom units were leased in July – most for September 1^st occupancy which is double the volume of the spring market! The entry level for two-bedroom units pushed to $2100 on average. Expect to pay upwards of $2600 for a two-bedroom with den and parking. One two-bedroom rental even attracted 14 offers! Days on market for even two-bedroom units is averaging just 8 days! Over 270 two bedroom units were leased – again double the normal volumes.