OCTOBER/NOVEMBER 2009 MARKET REPORT
Everyone seems to be preoccupied with the falling stock market and the inevitable recession. So let’s dispense with the usual report on monthly stats showing declining sales on the Toronto Real Estate Board this year and focus on what people really want to know. Where is the condo market heading in terms of prices?
But before we start, we need a refresher. First disregard what you read in the newspapers and what economists are forecasting. Real Estate is a local market – not a national or even a city wide market. National stats and city stats mean nothing. Yet that is what everyone reads. Secondly, average price means nothing too! Last year more high priced properties sold than this year. So even if the price of a particular property went up, the average price of all sold properties fell. Average price is misleading because it assumes the mix of sales never changes – yet it is always changing. Unfortunately there is no other public price information to use unless you can access detailed Board data such as we rely on. If you follow our Reports, we previously told you that the price of detached housing in downtown Toronto peaked in January – you did not have to wait until October to learn that. The primary reason was the introduction of the Toronto Land Transfer Tax. Sales that would have taken place in the spring happened last December and January. A second reason was that house prices went up too quickly in Toronto - double digit increases in each of the last three years. It is impossible for income growth to keep pace, and that means prices will always go flat or decline slightly until income catches up.
Historically, real estate prices increase by about 3% per year plus inflation. When prices rise faster, there is always a correction later. It happened in the U.S. And it is happening with detached housing in Toronto, but not to the same degree. Why? Another rule of real estate – excess supply does not necessarily mean falling prices. In most markets, if people don’t get their price, they simply take their property off the market. The only scenario where excess supply can depress prices is if people must sell at any price such as when power of sales and builder spec housing dominate a market. This is definitely not the case in Toronto.
So what is driving the condo market? Affordability. We have experienced only one year of double digit price increases. The rest of the time, prices have been rising by about 5%. Again if you read this Report, you know we track price changes of a particular condo in a specific building over a three to four year period in each issue. These types of price increases are certainly sustainable. Right now, the condo market is still experiencing year over year price increases up to the $350,000 price point, and a leveling of prices up to $500,000. Over that figure the condo market has shown some price softening. Most buyers in the higher price range are baby boomers, who because of economic uncertainty are postponing their buy decisions.
To provide a little statistical analysis to this Report, we looked at sales at 1001 Bay Street. The area is a great rental market and is popular with both end users and investors. The first unit we looked at sold twice in 2008. The first time it sold at $275,000 and then in July at $305,000, after the seller had changed the appliances and repainted the unit. The unit is a one bedroom plus solarium without parking at 640 sq.ft. The price increase was 10% and the sale price was $476 per sq.ft. The second unit we looked at, also a one bedroom plus den without parking, sold in May of this year for $285,000 after some minor renovations. It had been purchased 19 months earlier for $245,000 and realized a 16% appreciation. The price per sq. ft. here was $460. The final unit was a two bedroom with parking that was renovated and sold for $540,000 in July. It had been purchased, unrenovated, in 2007 for $350,000. At just over 1300 sq.ft., it sold for $410 per sq.ft. When you exclude the renovations, the conclusions are clear. Prices are still rising in 2008 and they are still in the annual range of 5%.
What we can also tell you about the condo market is that prices below the $500 per sq.ft. level will continue to appreciate. At this time we see NO significant price corrections. In fact we see the condo market leveling off at $600 per sq.ft. with Penthouse and premium view units selling in the $800+ range. That has been our forecast all year - unchanged.