March sales on the Toronto Real Estate Board continued the trend of previous months. Sales were 8% higher than March of 2011, and average prices were up by almost 10% from a year ago. These overall results mask a clear division within the market. Condo sales were unchanged from this month a year ago. Within the 905 Region, condo sales were ahead by 3%, whereas the 416 Region recorded a 2% drop from March of 2011. In terms of downtown condo sales, the results were even worse – sales were lower by 13%! Condo sales for the Etobicoke waterfront, which usually trails the downtown market, were up 10% from the previous March. Sales from the first two weeks of April confirm these trends that first began in February. House sales are outperforming the condo market in terms of sales growth and price appreciation.

So how do we explain the downtown condo market? A lack of overall listings is not the simple answer. In fact Active Listings are up 6% over March of last year. Either the number of end user buyers for condos is levelling off or buyer needs are not matching available listings. Developers better hope it is the latter and that they need to build bigger units. That’s a challenge as the product in the pipeline – preconstruction sales –consists of even smaller condos on average than units in today’s resale market. Buying opportunities exist in the resale market, particularly in bigger units over 1,000 sf. Condo resale prices continue to appreciate but at a much smaller pace – less than 4% on average.

To support this position, we looked at sales at The Element, at 20 Blue Jays Way in the heart of the Entertainment and Business District. Built by Tridel, it has great amenities that appeal to younger buyers. Condo fees are 56 cents/sf/mo. The first unit we tracked was a two bed/two bath unit with balcony and parking. It sold in December for $464,000. The same unit sold previously in June of 2008 for $406,000 and in July of 2007 for $365,000. The one year increase from 2007 to 2008, when the market was peaking was 11%. Note the market correction was 2008/2009. Over the last three and a half years, the increase was only 14%. The unit is 880 sf which translates into a price of $527/sf (including parking). The second unit we looked at was a one bedroom plus den, balcony, and parking. It sold in June of 2011 for $350,000. The same unit also sold in 2008 for $308,000. Over 3 plus years, it has appreciated by 13%. At 655 sf, it currently sells for $534/sf. Both units are on lower floors in this 24 story building, so views are limited. Again compare this building and prices to pre-construction prices in the Entertainment District today and it is hard to justify the premium being placed for future delivery in four years’ time.

RENTAL COMMENTARY:

Rental activity started to accelerate with units being leased for May and June 1 occupancy. Volumes almost doubled from last month and rental rates were unchanged. Studios averaged $1350. Over 350 one-bedroom units were leased at rates starting at $1500 without parking to $1750 for parking and a den. Two-bedroom units started at $2,000 and went as high as $2550 on average which included parking and a den. This month three, three-bedroom units were leased at an average of $3,000 and all of them were leased within seventeen days. The list to lease ratio is virtually 100% for all units. For investors, there is no problem in leasing your unit. The issue is that rental rates do not support current prices and because of this, we would expect to see a drop in new investors because they cannot cover their interest and operating costs.

While we have tended to be cautious lately – some might say negative – we still believe in the long term condo market. Most of our concerns have centred on the pre-construction market. Current pre-construction prices are just too high for investors.

On the other hand, the resale condo market is not going to collapse. In fact it will continue to grow and prices will continue to appreciate – albeit at a smaller rate than before. So let me give you five reasons:
1) People want to live downtown. This demand is fueled not just by immigration but by lifestyle changes of younger generations who much prefer Starbucks to shovelling snow.
2) Prices for detached and freehold properties are rising so rapidly that condo living will be the only affordable option to live downtown
3) Public transit outside of the downtown is terrible and it will be years before the problems are solved. The solution is to live downtown and walk or bike to everything.
4) As gas prices continue to increase, commuting will be more and more expensive. The solution is the same – live downtown.
5) Utility costs are rising rapidly and the most cost effective housing to combat these costs is condo living.

Any way you slice it, condo living downtown comes out on top for most people!!

February was another strong sales month on the Toronto Real Estate Board with sales ahead by 16 % over February of last year. But this increase masks some subtle changes within the market. When you compare the 905 Region to the 416 Region, sales were up by over 20% in 905 versus less than 8% in 416. In fact, 61% of all sales occurred in the 905 Region. By property type, detached house sales were up 24% for the month versus only 10% for condos. In the Downtown condo market, sales were actually 4% lower than in February of 2011. Why? First off, the mild winter meant that the Spring Market started much sooner in the outlying areas. The Toronto market has always been less seasonal. Secondly, there is a shortage of quality listings in 416 for both houses and condos.

Mid-month results for March confirm these trends. Overall sales are 7% higher for this year than in 2011. The house segment is ahead by 10% but condos by only 4%. In terms of prices, there is an even bigger gap between houses and condos. Year over year, house prices are 10% higher, while condos are up by just 4%, and downtown by only 3% on average. So why do the experts focus on a price bubble for condos and not houses? Our guess is that there is more press to be gained from forecasting a price correction with condos (all those cranes) than with houses.

In this Report, we looked at sales at 7 King East. This is a former office building converted to condos in the late nineties. In terms of location, you can’t get any closer to King and Bay than this prime location with PATH and subway access. The first unit we looked at was a one bedroom plus den with two baths, locker and parking. With 9 ½ ft. ceilings, it sold in November of 2011 for $450,000. At 860 sf, the price was $520 per sf. The same unit sold in 2004 (seven years ago) for $282,000. The annual appreciation was 7%. The second unit we tracked was also on the same floor. It is a two bedroom, two bath unit with parking and locker. It sold in September of last year for $495,000.  At 960 sf, this averages $515 per sf. The same unit sold earlier in 2006 for $357,000.  Over five years, the rate of appreciation was 6.7%. While these price increases are high by historical standards, they are in no way approaching ‘bubble market’ territory. By our definition, you need double digit increases over three consecutive years. While price increases should moderate, it seems highly unlikely that prices will decrease from current levels. On the other hand, we would be cautious about pre-construction developments which are being offered for sale in the same financial district for $700 per sf without parking.

RENTAL COMMENTARY:

The rental increases reported in January were confirmed with the February sales figures. Rental volumes for February (usually one of the slowest months) matched those of January. Downtown, nineteen studios were leased for $1350 on average. These listings lasted only nine days on average. The market for one bedroom units without parking starts at $1500. If you want parking or a den, you can add another $125 per month. If you want both the den and parking, the number is $1775 on average. The one plus one with parking  is the most requested unit type with just under a 100 units rented at an average 100% of list price. Two bedroom units start at $2100 without parking and will reach $2500 for a unit with den and parking. Interestingly, two bedrooms without parking take about 25 days to lease on average versus just 14 days for those with parking. The rental market is tight and there is little room for tenants to negotiate.

This will be the last year of the pre-construction boom in condo sales! The developers know it! Why do you think there are more new projects being rushed to market than ever before? The pre-construction market is dominated by investors. Investors buy pre-construction for only two reasons. First they buy on the expectation that prices they pay today will be lower than prices four years out, when the unit will be ready for occupancy and registered. Today investors are being tempted by projects in the financial district at $700-$800 per sf without parking. In comparison, you can buy resale for $520 per sf at 7 King East, and that includes parking. For today’s resale prices to reach today’s pre-construction prices in four years, you need the resale market to appreciate at 9+% per year. It’s never going to happen.

The second reason that investors buy, is for rental income. When condo prices exceeded $500 per sf, most ‘Rate of Return’ investors (read North Americans and Europeans) left the market. The remaining buyers are what we call ‘Wealth Preservation’ investors (read Middle East, Asians, and SE Asians). They want a safe place to park their money and earn a return. At $600 per sf, they were able to achieve a ‘cash on cash’ return of about 4%. At $800 per sf, the return drops to 2%. Why would any investor put their money in a condo versus the bank?

There is no logical reason for investors to buy at these pre-construction prices. Eventually the message will sink in. Still, there will be a pre-construction market in 2013. It will be smaller in offerings and the prices will be lower than today

So how do these changes impact the resale condo market? Are these markets not interconnected? The answer is: not really. The resale market is dominated by end users. They qualify based on their income and the level of mortgage rates. Since 2004, prices have risen by 7% per year on average. This is not sustainable going forward as incomes are only rising by 2-3% on average. The reason for the big jump in prices was the drop in mortgage rates from the 5-6% range to 3%. Going forward, rates are not going to fall further. In fact we would expect them to start to increase slowly. The end result is that resale condo prices will level off at current prices and then increase in the 3% range (the historical average increase for real estate).

Remember that most sales in the resale condo market take place because of lifestyle changes and not economic changes. People buy condos for the space they need today – not for five years from now. And when Grandma dies, I have never heard an Executor ask me about the condo market and whether they should rent the property out for a year. It is always sell! Worried about those buyers with 5% down, not being able to afford their condo if interest rates rise? Worry not. All these buyers have five year locked in mortgages. Why? They qualified at their own mortgage rate (3%) versus the posted rate of over 5%. With a 25 year amortization, after 5 years, these buyers will have repaid 15% of the principal and will have 20% equity in the property even if it does not go up by one cent in five years! Think these people will walk from their property? Not likely.

There you have it. The resale condo market will continue to grow in size going forward. Lifestyle and continuing migration to Toronto will ensure that more and more people will want to live downtown. Prices will not increase like the past, but they surely won’t go down either!!

January is in the books – TREB sales are up 8.8% over January of 2011. For February, sales are running about 9% higher than the same month in 2011. So where does that put those people calling for a market correction in 2012? It certainly won’t be the spring and summer markets, so guess we will have to wait until the fall to prove the bears wrong! On the other hand, the condo market has been the slowest segment of the market. Overall condo sales were down by 1%. The supposed red hot condo market downtown produced a drop in sales in January of 10% compared to 2011. At the same time, ‘active listings’ were 22% lower! There is the problem with the condo market. Last spring we had almost 1500 listings downtown and the bears were saying that the condo market cannot absorb all these listings. Today we have just over 800 active listings.

However, our biggest concern is that there is a growing disconnect between the resale condo market and the pre-construction market. The resale market is populated by end users who have real jobs and mortgages. The pre-construction market is investor based. Investors are betting that prices will keep on rising. When we suggested in our 2012 Forecast that $800/sf was not sustainable and that the real market is in the $500 to $600/sf range, we received some criticism from the development industry. In January we are starting to see developers offering more incentives, including some price reductions, to sell these new projects.

To prove our point, we looked at resale prices in one of the more popular buildings on the Toronto Waterfront – the Waterclub at 8 York St. This 8 year old building with great views and amenities is very popular with first time buyers. The first unit we tracked was a one bedroom, one bath, with parking. On a high floor but with a city view (no water), it sold first in 2004 for $206,000. It sold again in 2011 for $330,000! Over seven years, the property has appreciated by 60% or 7% per annum. At 555 sf, this calculates at just under $600/sf. (If you remove the parking spot, the price would be $535/sf). The second unit we examined was a two bedroom, two bath with den and parking. It sold in 2004 for $383,000. The same unit sold again at the end of 2010 for $587,000. Again the rate of appreciation was 7% per year. At 1092 sf, the unit sold for $537/sf and it possessed great water views. When prices are rising at 7% (and salaries are not keeping pace), there must eventually be a levelling off of prices. Historically, real estate prices tend to increase in the 3-5% range.

RENTAL COMMENTARY:

January, usually one of the slowest rental months, was extremely active. Fifteen studios were leased along with 268 one bedroom units, and 136 two bedroom units in the downtown market. While rental numbers were slightly higher than a year ago, we see a significant increase in rental rates. Today, studios rent for just under $1400 versus $1250 a year ago. The average rent a year ago for a one bedroom unit without parking to a one plus one with parking was $1450-$1650. Today the range is $1550 -$1750. For two bedroom units, the range last year was $1850 -$2200. Today one can expect to pay from $2100 without parking to $2500 for a unit including den and parking. We are already seeing the type of increases we predicted in our 2012 Market Forecast. Note that most condo units built after 1997 are excluded from rent controls.

People cannot save enough to retire and if you do not have a defined benefit plan – read government and teachers – you are screwed!! I had a friend who maxed out his RRSP for 30 years – accumulated over a million bucks – and figures that will pay him out about $55,000 per year. Not even close to a teacher whose pension is also indexed for inflation. Now most of us never max out our RRSP and that is the problem.

What to do? Banks and other wealth managers want to increase the limits for RRSP contributions but that won’t solve anything. My solution is to get a SELF DIRECTED RRSP. If you have $60,000 saved, lend it to yourself as a second mortgage and then buy a $260,000 studio condo (probably the cheapest and easiest form of real estate investment for the average person). In 25 years, the condo will be paid off through renting it out and with just 4% annual appreciation; you will have an asset worth $700,000! Do it twice and you can retire!! Naysayers will tell you that interest rates, condo fees, and taxes will go up over time. So will rents to offset these expenses.

Even real estate agents have trouble figuring this out! We have a couple of agents who borrowed big to invest in the stock market and guess what? The returns from their investments cannot pay off their loans! If only they had stuck to what they know best. Most people can accumulate three properties in their working life besides their principal residence, and they can retire. Seems simple to me but what do I know??

Now compare that to our downtown Toronto condo market. The average studio here is 400 -500 sf. ( A note of caution, lenders hate to finance anything less than 400 square feet, so stay away from these units). In the resale market the price is about $600 per square foot. In the new pre-construction market, you can expect to pay $700-800.

Now I am not against having Toronto prices at or higher than New York’s. But just think for a minute, salaries in New York are considerably higher than in Toronto. As for rents, studios here are moving up to $1400 per month (they used to be $1200) whereas in New York it is $1700-$2000. Do the math! Our prices cannot go any higher unless rents move up and that means salaries must be higher too. When will that happen? As a potential property owner, do you want to bet on that?

For investors, when they buy at $800 they are betting or guessing that resale prices will be at that level in four years. Currently prices are $500+. If you assume an average rate of appreciation of 5% then you will only get to $600+. At 7% (not likely) the number is $650+. If capital gains are not the reason that investors buy, then it must be rental income. The best returns are usually with studios. So take a 400sf studio costing $500,000. Assume it rents for $1400 (in four years time) and that taxes and condo fees combined are $300/mo. The return on your investment before financing is 2.6%! If you finance you have negative leverage! We know that many non-resident investors pay cash. But their bottom line is still 4%!

Now let’s look at the developer. We know he can build for $200+/ sf and soft costs (commissions to agents and other fees from architects to advertising) will come in at another $100+/sf. We are told that the culprit in rising prices is land costs. Take a parcel of land that will convert into 400 units at an average size of 700 sf. Land costs of $100/sf would translate into a purchase price of $28 million. At $200/sf, land costs would be $56 million. So the total cost to developers is $500/sf at the outside. To prove my point, Menkes bought 90 Harbour St. for $76 million and intends to build 1400 condo units on the site (plus a commercial tower). At $100/sf the price is $98 million and the commercial is free!!

Something tells me that if we could get pre-construction condo prices back down to $600/sf, everyone would be happy again. The market would continue in a healthy state for years to come. Investors would continue to buy, end users would not get priced out of the market, developers would still be making money (maybe not as obscene as before) and yes – Realtors (that’s me) would still have product to sell and resell!!

2) Do you have a computerized Listing and Buyer Presentation in today’s market? TO HELP: Two FREE options: you can go to the RE/MAX Design Centre and get a Power Point Presentation or you can go to RE/MAX MainStreet for the i Pad Application.

3) Can you present the difference between Client and Customer Service? TO HELP: Prepare a comparison of obligations and benefits. Done right, 90% of potential buyers and sellers will choose agency. Many of you are providing implied client service without getting a Buyer or Listing Agreement signed.

4) Have you a Mobile Web Strategy? TO HELP: Two FREE options: RE/MAX Condos owns the mobile key words: ‘condos’ and ‘freeholds’ which provide access to all listings with the listing agent receiving the lead. RE/MAX Condos has also launched mobile micro sites for each agent. These are mobile sites with an address of: lastname.remaxcondosplus.com. People coming to these sites can access all our listings but only through the agent whose site they visit.

5) Use the right forms. TO HELP: Do NOT use the new OREA Condo Assignment Agreement #141. The price on #141 is the reimbursement of deposits plus the price difference and NOT the value of the property which will cost you commission (use the Agreement of Purchase and Sale with appropriate Assignment Schedules). For Posted Listings, you do not need a ‘Seller Commission Agreement with Co-Operating Brokerage for a Listed Property’ signed first. Just include in your Offer: ‘The Seller agrees to compensate the Buyer 2.5 per cent plus HST of the sale price through the proceeds of the sale in order to satisfy the Buyer’s contractual agreement with the Buyer\’s agent/brokerage known as RE/MAX CONDOS PLUS CORP., Brokerage. The Seller hereby irrevocably authorizes and directs his Solicitor to pay such amounts directly to RE/MAX CONDOS PLUS CORP., Brokerage out of the sale proceeds before making any payment to the Seller from such sale proceeds.’

The truth is that most people buy and sell for non-economic reasons. Take condos. People tend to buy a condo for their needs today. Younger people want their own pad, they partner up, they separate, and they have kids. All of these events cause people to buy and sell. Consider older people. They move to a retirement home, they move to be closer to their family, or they may even die. I have never heard an Executor of an Estate say the market is not right today, let’s hold on to the parent’s condo for another year.

So you see, most sales are not governed by economic factors at all. The size of our market will be determined more by human events. The more people, the more sales! Pretty simple. In terms of prices, real estate does not work like other investment markets. In those markets when there are more sellers than buyers, the price will fall until buyers and sellers come into balance. In real estate, if an owner does not get their price, they just take the property off the market. They do not lower the price! Why do you think that the sales-to-listing ratio is never 100%? In fact normal is closer to 35%! Hence over time, real estate prices will only increase. The experts don’t want you to hear that! The only time when prices fall is when people have to sell at any price – the U.S. experience when people cannot make their mortgage payments. Could that happen in Canada? Not likely. Currently, mortgage arrears in Canada are just under .4%. In the U.S. the number is 7% or 17 times greater.

In summary, we don’t really need real estate forecasts. But people always want to know what the experts have to say about the future. And forecasts make good media copy too.

At this time last year, we were predicting that Toronto would experience the same sales volumes as 2010 with price increases averaging 5%. We were wrong! Sales increased by 5% and prices were up by 7%. We also forecast that rental rates would increase by $100 per month and we were right. Everyone else, from the Bank of Canada to The Economist Magazine, was forecasting lower sales and lower prices. Those who heeded the experts, in an attempt to ‘time the market’ were the big losers once again. Timing the market is the absolute worst strategy! If you sit on the sidelines and the market keeps rising, you lose significantly. If you are in the market and prices go flat or fall, then all real estate declines (more expensive properties tend to fall further in absolute terms), and it becomes even cheaper for those people in the market who want to upgrade to a more expensive property over time. Too many experts – read economists – try to make residential real estate far more complicated than it needs to be. Residential real estate is all about having a roof over one’s head. You either own the roof or someone else owns the roof and you are a renter. The challenge with this year’s Forecast is to look at both the Pre-construction and Resale Condo Markets and to understand their interdependency.

 2012 FACTORS TO CONSIDER:

• Interest rates are not going anywhere. Fear mongers keep talking about a rise in interest rates which could lead to problems. What you need to know is that if rates rise, it means the economy is stronger and we have higher inflation. That translates into higher personal income too, which will act as an offset. For those old enough to remember, inflation has always been a friend to real estate.
• While the so-called experts worry about the supply of new condos coming to market, they seem unwilling to forecast future demand. For condos, the impact of ‘baby boomers’ moving to condos is still just a trickle. In five years, it will be significant. The next biggest demographic group is the ‘echo’ generation – the children of baby boomers. They are just now entering the real estate market and this segment is focused on condos. Finally immigration to Toronto is not going to slow (80,000 per year) and many of these people will be living down town too.
• For the Pre-Construction Market, almost 100% of sales are to investors. No one buys a property to live in that won’t be ready for four or five years. Investors buy condo units either to rent them out (about 40% of the units) or to sell them as ‘Assignments’ (during the occupancy phase and before the units are registered) to end users to live in. So investors look at rental rates and try to anticipate future price appreciation. Currently our market is dominated by investors from Asia, the Middle East, and East Asia looking for capital preservation. American and European investors who are rate of return driven show less interest in our market. Canada will remain a safe haven for the foreseeable future.
• There are no new apartment buildings in Toronto. The rental market is being served through new condo construction. The `echo’ generation or Gen X and Y are also the primary renters in this market, and again, they only will rent new – read hardwood floors, granite counters, stainless steel appliances found in condos.

2012 FORECAST BY THE NUMBERS:

• For the Toronto resale market we expect sales to remain at the 90,000 level (unlike most other forecasters). Remember that the all time sales record was achieved in 2007 and Toronto is a much bigger market, in terms of people and incomes than five years ago. So why would sales drop? With a lack of new detached housing, prices in this sector – particularly in Central Toronto will continue to appreciate.
• For the Resale Condo Market, sales will be 10% higher than for 2011. We have 18,000 condo units that were completed in 2011 and half of them will be added to the resale market. This extra supply will mean that prices will be flat in 2012, staying in the $500-550 per sf range.
• For the Pre-Construction Market, we expect a number of projects that were announced will not be built. By the end of 2011, pre-construction sales downtown were averaging $800 per sf which we believe is unsustainable. The price gap between the resale and pre-construction markets is too big and fewer investors believe that resale prices will rise that fast over the next four years to overcome this difference. Look for prices to fall by $50-75 per sf over the year. Projects selling at over $1,000 per sf (with the exception of Yorkville) will run into severe price problems in 2012.
• Bigger sized condo units in the pre-construction market now sell for more per sf than smaller units. This trend will spill over into the resale market. We previously predicted that this would happen. This price differential will only increase as our market matures – just like New York.
• Rental rates will increase by another $75 per month. That means the basic one bedroom without parking will increase to $1600 per month. Vacancy rates will remain below 1%.

But for someone buying a home (note I did not say house because we sell condos!), it is really quite simple. How much do I have for a down payment plus how much can I afford to pay or carry each month? A mortgage broker or a lender will determine how much you can afford, based on your income and your current debt levels (credit cards, car payments). By afford we mean how much can I pay each month (or each week if you prefer) and still live!!! It’s just like figuring out how much I am going to pay for groceries each week or month. This number will determine what I can buy! So it is not about the price of the property but rather, what can I afford to pay each month or week.

Smart agents know to show people properties on the basis of monthly or weekly payments – not on the basis of a list price! For example: when condo fees or property taxes are higher for one 600 sq.ft. unit than for other comparable sized units, then the price of that unit will adjust downwards until carrying costs are equal to similar units (mortgage payments plus condo fees and taxes)! That’s why prices are lower at the Pantages and Soho – condo hotels – than other condos downtown. It’s not because owners under price their units, they already know they have to compete on total monthly carrying costs to sell. So don’t think you are getting a deal just because condo prices look relatively cheaper in one building over another.

Most Realtors were excited to report that sales on the Toronto Real Estate Board in October were 17.5% ahead of October in 2010. My take is that October is the busiest month of the Fall Market and sales were ahead by only 2% compared to September of this year. Last year, the September to October increase was 6%!  Last month we stated that preliminary October sales may well indicate a slowing of this market and final October results seemed to confirm our views. Looking forward, we are expecting November sales of 7400 units which would only be a 3% drop off from October. Our guess is for a fairly consistent market over the winter.

Currently the downtown condo market frenzy is centred on pre-construction sales. While there are too many launches to count (every downtown parking lot has a sign), the most important factor is to track the `price gap’ between this market and the resale condo market. The resale market is at about $500-550 per sq.ft. The pre-construction market is $700 per sq.ft. and higher in premium projects. In buying, Investors are betting that in four years time, the resale market will rise to pre-construction price levels. When the price gap is below $100, investors are much more confident. However with the size of the current gap, we believe that some investors will start to pull back and there will be a number of new condo projects that will not be built. Pre -construction prices should begin to level off and in some projects might actually be reduced!  Rental rates, which have moved higher by over a $100 a month this year cannot support these pre-construction prices unless rental rates move higher by another $250 per month over the next four years. Is this realistic?

This month, we looked at sales in Palace Pier – 2045 Lake Shore Blvd. on the Etobicoke Waterfront. This is a premium building with great city and water views. While older, it is well maintained. The building represents tremendous value here but the problem is the high condo fees.  The first sale we looked at was a one bedroom with parking, locker, balcony and lake view. At 920 sf, it sold for $280,000 in September or just $305 per sf. The same unit sold in 2005 – 6 years ago for $245,000 for a price increase of 2% per year. An identical unit on a lower floor sold for $273,000 in October. Condo fees, which include all utilities, valet parking and shuttle bus to downtown, are almost 90 cents per month. Most condo buildings with all utilities included are in the 65 cent range. The second unit we looked at was a two bedroom – two bath unit with solarium, parking and locker which sold for $342,000 in August of this year. It was 1550 sf. and sold for just $220 per sf. Again condo fees are 83 cents per sf per month. The same unit sold previously in 2007 for $318,000 and in 2002 for $264,000. The price appreciation for this unit was just under 3% per year. While high condo fees are certainly a drag on prices in this building, the primary reason for it’s being out of favour is that the condo market is being driven by younger buyers who want newer, smaller, more affordable units. However, over the longer term, we believe that when baby boomers sell their million dollar plus houses, they will need bigger sized condo units (there will be a severe shortage of these in the future) and boomers will appreciate valet parking, regardless of the cost. 

RENTAL COMMENTARY:

The rental market continued to be very active, even though this is usually the slowest period of the year. Studios continue to be in short supply with only 20 units being leased for $1350 on average. Over 220 one bedroom units were leased downtown in October with rents ranging from $1500 for the basic without parking to $1750 for a one bedroom plus den and parking. Over 100 two bedroom units were also leased from a low of $1950 to a high of $2500 with den and parking. As mentioned previously, there is a shortage of three bedroom units. Only two were leased in older buildings at an average rent of $2500. Tenants are paying, on average, a 100% of list price so there is little room to negotiate in this type of market.  Landlords are also being more selective with tenants and are demanding good credit scores.

First, do not put the condo in a company name! Lenders hate it – even with a personal guaranty. The primary reason is that these mortgages cannot be packaged easily for resale by lenders, which is how they do their business. Rather than turn you down, they will start making more and more demands/requirements before they will fund. And they keep adding to the list as you approach the closing date in the hopes you will go away. Note they never turn you down – you just don’t meet all their requirements at closing!

So you put the property in your own name. With the new mortgage rules, you only qualify for an 80% mortgage with a rental property. But again the lenders are smart. They will only give you 80% on what you purchased it for at the outset – not what it is worth today. (On the other hand, if property values had gone down, they would lend on 80% of today’s price!) Furthermore, if you have upgraded your condo with the builder and you paid cash – that is the only way builders work with upgrades, then you get no credit with the lender for that either.

Your best solution is to try to close the condo unit for ‘all cash’. Then refinance up to 80% of appraised value. With this option, you will find you can get more money and there will be fewer borrower requirements. If you cannot close ‘all cash’, then close with an ‘open’ mortgage and again refinance.

Now you know why our banking system is considered the safest in the world. No risk lending!

So who buys the pre-construction sales? Of course it is investors. Investors do the math. Historically, smaller units have performed better than larger units in price appreciation. But more importantly, smaller units are easier to rent and the rental returns are better. Hence they opt for smaller units. To prove my point, the Water Club Condos on Queens Quay consist of three towers. The first two designs were all smaller units. The third tower was supposed to be all larger units. The developer could not sell them at the pre-construction stage and hence he had to go back to the drawing board to make them smaller. Remember developers cannot build until they reach at least 70% pre-construction sales and in many projects, the percentage asked is even higher! No sales – no build!

So with that background, what do you do if you are still determined to find a three bedroom condo? You have two choices. If you have a lot of money, you can buy a Penthouse. Builders always keep a number of these units off the market until the Occupancy stage. Your other choice is to focus on older condo buildings. Those built before the 1989/90 market correction when construction financing did not require all these pre-construction sales. Sorry to say, current condo inventory is very tight for those baby boomers who think they can sell their house and downsize to a condo of 1800 sq.ft.

September followed August as another in the string of excellent sales results for the Toronto Real Estate Board with 7,600 sales taking place. This was 25% higher than September of 2010. On a year-to-date basis (for nine months), sales are ahead by 2.6% over last year and we should end the year at just under 90,000 sales – the second best year since 2007. The condo market continued to mirror the overall market for sales.

Looking to October, we expect sales to be only slightly higher than September, which would be the first sign of a slowing market. While active listings are still lower than a year ago (a sign that prices are not about to fall), there are less active buyers over the last few weeks. Mortgage restrictions introduced by the Federal Government in stages are now starting to impact demand. Sellers trying to maximize their price may have missed the peak for now and may have to wait to test the spring market.

Most pessimistic views tend to focus on the downtown condo market. Naysayers look at all those cranes in anticipation of a market correction. But at the end of September, active condo listings were 4% lower than the same time last year (all those new units were either bought by end users or were rented out). The downtown condo sale-to-list ratio now stands at 37% versus 29% last year and compares very favourably to the overall market at 40%.  And trends going forward such high gas prices, traffic congestion and higher utility costs can only favour the downtown condo market.

In this Report we looked at the Bay Street condo market which is popular with both investors and end users who work in the downtown core. One of the newer, taller and perhaps most popular buildings are College Park. We looked at sales in both 761 and 763 Bay. The hottest unit, a one bedroom plus den with parking and locker sold in May of this year for $525,000 at 761 Bay. It occupied 755 sf on a mid level floor (the twenties) and sold for $695 per sf. Previously, the same unit sold in February of 2009 (the bottom of the real estate dip) for $365,000. That is a 43 % increase in 28 months! The second unit we tracked was at 763 Bay, a two bedroom plus den with parking and locker. It sold in April of 2008 (before the market dip) for $510,000 and then again in June of this year for $621,000. At 975 sf, that is a price of $637 per sf and a price appreciation of 22% over 38 months, or about 7% per year, which is consistent with our market. We also checked another sale of a small one bedroom with parking at 763 Bay and the price per sf was $750 on a sale that took place just last month. It is safe to say that condo prices on Bay Street are the highest in Toronto outside of Yorkville.

RENTAL COMMENTARY:

The rental market downtown is extremely tight. Multiple offers on rentals are not uncommon. In September 25 Studio were leased at an average price of $1350 per month, but the average list price was only $1320. Go figure! Over 215 one bedroom units were also rented from a low of $1550 without parking to a high of $1800 for a den plus parking. These are the highest rental prices we have seen this year. The market for two bedroom units, with over 125 units being rented, ranged from a low of $1900 without parking to a high of $2500 on average for a unit that included a den and parking.  Days on market ranged from 3 to 10 days on average, depending on the unit. That is the shortest period we have seen. Tenants get your running shoes on. Don’t start shopping without a filled out Rental Application and an Employment Letter.

August was another strong sales month in Toronto. The Toronto Real Estate Board (TREB) reported 7,500 in sales – 24% higher than for August last year. In the total condo market, sales were ahead by the same percentage. However, Downtown condo sales were 30% higher. What is more impressive is that the sale-to-listing ratio went up from 34% a year ago to 42% this August in spite of more product. A balanced market – between buyers and sellers – is usually 25-35%.

The real question for many is: how will this market perform going forward? We are expecting about 7,000 sales in September.  While this will be down from August, it is consistent with the seasonality of real estate sales.  October is usually the largest sales month in the fall. If you want an early indication of the market for 2012, just watch the numbers for October and November for a clue.

But for most people it is all about the prices. While we hate talking in generalities about prices per sq. ft. for the overall market, our feeling is that prices are about to level off. In the condo market, there are really two markets. The pre-construction or new condo market is fuelled by investors who then rent or resell their units into the resale market for end-users which gets reported as TREB sales. Investors are only concerned with prices and our new projects are now approaching the $600-700 per sq. ft. range. Only ten years ago we were talking $300. On the other hand, New York prices have been at the $1,000+ range for several years and are not moving much. We all like to compare ourselves to New York but we are not New York in terms of either money or appeal. Resale prices are always lower – today about $500-600 per sq.ft. Investors only buy if they believe they can sell for more later and the price difference with New York is now quite small. And if pre-construction does not move higher, then neither will resale.

So let’s look at actual prices in the Distillery District. – just east of Downtown. We selected a building that appeals to people who like the soft loft feel and has minimal amenities, which keeps condo maintenance fees low. The building is 80 Mill Street and with 195 units, it has a good sales history. The first unit we tracked was a one bedroom plus den with balcony and no parking. At 640 sq. ft., it sold for $303,000 in June of this year. That’s $473 per sq. ft. The same unit sold in 2007 for $237,000 and in 2006 for $223,000. The price gain is 36% over five years. The second unit was bigger at 974 sq. ft. It is two bedrooms two baths, with den and parking. It sold in August of this year for $435,000 or $446 per sq. ft. The same unit sold the year before for $395,000 which represents a 10% increase. So why are these units selling below the $500 per sq. ft number? First the east side of Yonge St. has historically sold for about $50 per sq. ft. less than the more popular west side of Yonge. The building is also ten years old and has limited amenities which eliminate a lot of first time buyers.

RENTAL COMMENTARY:

People renting in August are now looking to the fall market. The lead time from renting to occupancy is about 45 days on average. In August the downtown condo market leased out 19 studios, 256 one bedroom units and 174 two bedroom units. This was about 20% lower than in July. Studios were renting for $1275 per month. The entry level for a one bedroom unit without parking is now $1500. The most popular unit is a one bedroom plus den with parking which now rents for about $1725 on average. Two bedroom units start at $2,000 per month and rise to over $2500 on average for two bedrooms plus den and parking. If you can find a three bedroom unit (three were leased in August), you can expect to pay over $4,000 per month.

Our rationale has nothing to do with low rental rates for condos or the rationale of per capita income to condo prices. Rather it has everything to do with our prices versus those of other major cities in the world and more particularly New York where we like to draw comparisons – even if only to dream!

When we look back ten years ago, resale condo prices were just above $300 per sq. ft. and pre-construction or new development sale prices were at $350. Today we are at $500-600 in the resale market and $600-700 in the new market. New York has not enjoyed that level of appreciation. In Manhattan you can find condos starting at $1,000 per sq. ft. and that market has far more appeal than ours and has a lot more wealthy individuals. It is also not moving up as quickly.

While experts keep focusing on the end-user in the resale market; prices in the new development market trickle down to the resale market. (Yes most investors are well financed and they will only sell their units at a profit – not a loss). Right now, there are less and less investors who have the appetite for condos at $700 per sf which will be the brake to the resale market where you find the end-users.

What Mr. Madani has done is to plot house prices versus income per capita over 25 years for Canada. We have previously criticized the one market theory for Canada. Real estate is very regional. When you look at the U.S. , prices are still decreasing in some parts of the country yet, they are rising in others like Manhattan.

But what is really disappointing for an economist is that the simplicity of the graph assumes that housing affordability and hence prices do not change over time. For most of the period, interest rates were 9% and higher. Today they are at 3%. Of course people can now afford and buy a more expensive house. The only justification must be that Mr. Madani believes 9% mortgages are just around the corner. When do you want to bet that it will happen?

The second problem is that income per capita is based on Statistics Canada data. Twenty five years ago, the underground economy was very small. Today you tell me what the number is? My guess is 20% and that never appears in the stats.

In conclusion, I am not naive enough to believe that prices will rise indefinitely. I do know that our prices will level off and perhaps decline by a small amount at some time in the future. People who want to wait for a 25% correction can probably rent in the Toronto market for at least the next ten years; and perhaps forever!!

No surprise, July sales on TREB were 23% higher than July of 2010. That marks the third month in a row where sales exceeded the same month last year. Even the most conservative experts have now conceded that 2011 will surpass sales of 2010. The all time sales record is still 2007 – some four years ago – so this market is still not behaving like the gold market!

Condo apartment sales were also ahead by 28% over July of 2010. Downtown, condo sales were 33% higher and even the Etobicoke Waterfront had its best month of the year with sales 60% higher than July of ’10. The fact that condo sale increases are running ahead of the overall market is a reflection of a change in lifestyles and also an increasing supply of condos.

So called experts keep calling for a market correction some time when interest rates rise. Given the Euro and the U.S. debt problems, we now know that rates will remain low for at least another year. But even when rates increase, our market will still be in solid. Consider someone who buys with 5% down and takes a 5 year fixed rate mortgage at 3% amortized over 25 years. After 5 years, that person will have built up a minimum 20% equity in the property, without any price appreciation! Does that sound like a future problem for our market?  In the days of 9% mortgages, an owner would only have paid off 7% in the first 5 years. So low interest rates not only mean lower monthly payments for buyers but also a faster build up of equity. What causes market/price corrections is when owners are forced to sell at any price – when they have little equity in their property.

This month we examined sales in one of the most popular buildings for Generation X and Y: the Hudson at King West and Spadina. The first unit we looked at was a one bed – one bath with no parking and no locker. At 509 sf, it sold for $328,000 in March of this year. That’s $642/sf! It previously sold in 2009 for $294,000 and in January of 2007 for $211,000. That is a 55% price increase in 51 months – 1% per month.  This is a hot building! The second unit we tracked was a two bed- two bath with parking and locker. At 902 sf, it sold in April for $550,000 for a price of $600/sf. The same unit sold in 2010 for $500,000 and in 2007 for $395,000. That works out to a 40% over 48 months.  As a matter of interest, another two bedroom unit sold in May of this year for $684,000. It was slightly larger but the primary difference was a 600+ sf terrace. When we adjust for size, the premium paid for the terrace was $50,000!

RENTAL COMMENTARY:

Activity in the rental market continues to pick up as we head to September – the seasonal peak of the market. In July 34 studios, 383 one bedroom units and 193 two bedroom units were leased in the Downtown market. During the past couple of months, several new condo buildings have entered the market and it is amazing how quickly these new units have been absorbed. Studios can still be had from just under $1300. One bedroom units have increased in price about $50; starting with the basic without parking at $1450. The one bedroom plus den and parking is now renting for almost $1700 on average. Two bedroom units average $2100 without parking up $2400 with a den and parking. These prices are on average $75 per month higher than the start of the year. But what is just as telling is that the average days-on-market for rentals is 10 days for the one bedroom and 15 days for the two bedroom units.