Toronto Real Estate Blog

2011 IN REVIEW:

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%.

June/July 2011 Market Report

SALES COMMENTARY

Toronto Real Estate Board sales in May were just over 10,000 units. This was 6% higher than for May in 2010, and marked the first month this year where sales exceeded the same month in 2010. That trend will continue for June. We are looking at 10,000+ sales and June will be the biggest sales month of the year. Furthermore, expect every month for the balance of 2011 to surpass that of 2010. The final year end count will show that 2011 sales are greater than 2010. No one predicted that, except in this Market Report!!

All condo apartment sales in May were just 3% higher than for May in 2010. Downtown condo sales were also ahead by 3%. Unexpectedly, sales in the Etobicoke waterfront were down by 19% from May of 2010. Part of the reason was the introduction of several new pre-construction projects in a market much smaller than downtown. This had a negative impact on the resale market.

However the real brake on the real estate market has not been rising prices, but the lack of listing inventory. Even in the downtown condo market, with the registration of several major condo buildings that has increased product in the resale market, the sale to list ratio has risen from 32% last year to 38% this year!

The problem is that most experts cannot measure rising prices. Just look at the TREB stats for May. The average price for downtown properties west of Yonge St. was $370,000 – the previous May it was $373,000. East of Yonge St., the average was $405,000 and in May of 2010 it was $360,000. Now anyone who knows the market will tell you that prices west of Yonge for similar units are 10% higher than the east side. And buyers can tell you that prices certainly have not fallen over the past twelve months. But that is what the stats say and the experts rely on this information to tell you what to do in real estate! Of course the problem with averages is that if the mix of sales changes over time – one year more expensive properties sell- then the resulting averages are meaningless. And this always happens. That is why this Report only tracks price changes over time for identical or similar units to get a real price change in the market. Unfortunately the experts don’t have access to this information.

In this Report w looked at sales at 21 Carlton St., The Met, a four year old building. It is just steps from the College subway station, and is located between U of T and Ryerson Universities. You can’t find a better building for Generation Y or for investors. The first unit we looked at was a one bedroom plus den with two baths, parking and locker on a high floor. It is 680 sf with a balcony. It sold in 2011 for $407,500. It previously sold in November of 2007 for $330,000. This represented an increase of 24% over 42 months, with a price just under $600 per sf. This is the most popular style of unit in downtown Toronto. The second unit we compared was a two bedroom, two bath unit, with parking and balcony. It is 870 sf. It also sold this year for $469,000 and previously in August of 2008 (before the market correction) for $457,000. You could argue that the person bought the unit in 2008 at the peak of the market- exactly at the wrong time – yet it still increased by $12,000 in 29 months. This unit is now selling for $540. Two points we can make: there is no wrong time to buy, provided you hold the property for at least three years; and over time the price appreciation in Toronto has not been speculative but steady.

RENTAL COMMENTARY:

The studio market continues to be one of the best segments for investors. In May, 29 units were leased at an average price of $1300. One bedroom units without parking were leasing for $1400. Parking will add another $100 per month. One bedroom plus den units leased for $1600 to $1650 per month with parking. In total, over 400 one bedroom units were leased in May as we enter the seasonal peak of the rental market. Two bedroom units start at $1900 without parking and will average $2400 which includes a den and parking. 150 two bedroom units were leased in May. The rental market is tight – units are staying on the market for 10-15 days on average and investors are getting close to 100% of asking or list price.