Over the past ten years, Toronto has experienced the biggest construction of new condo units of any city in North America. Also over this same period, the gap in prices – on a square foot basis - between new developments and resales has ranged from a $150 premium at the peak to as little as $25.
New developments attract a premium for two reasons. First, owner/occupied buyers prefer new or never lived in compared to a resale. Secondly, investors prefer new because they do not have to invest as much at the front end and may be able to secure a unit for as little as 10% down (until registration) with a chance to sell before registration versus a minimum of 20% down to obtain a mortgage on an existing unit.
Today there are some new developments being offered for sale at the SAME PRICE as current resales. Is this a great deal or do developers know something that the public doesn’t?
One reason is that condo rental rates have not increased in three years, whereas condo prices have been moving up. The end result is that fewer investors want to buy new developments today. The second reason is that developers are concerned that the condo market may not continue to absorb such a high volume of new units. So some developers are thinking: ‘let’s blow out’ this project quickly and lock in our profits – albeit at a smaller number’.
Investors need to be careful today. They need to focus on only those new developments whose prices are at resale levels. Next they need to figure what the unit will rent for – at today’s rents. How much do they need to put down as equity so that the rents will cover the mortgage, condo fees, and taxes? If it is more than 35%, then don’t buy! You need to do the same math for resale units as well. All things being equal, we would buy the new development