Big City Condo-monium Turning Into Pandemonium?
Big City Condo-monium Turning Into Pandemonium?

One of the hottest topics in the country continues to be, surprisingly, what’s going to happen in the Toronto condo market. Put ten people in a room and depending on whether they are analysts, sellers, buyers, realtors or just interested bystanders, you are bound to get ten different opinions.

In fact, the discussion has turned from simple analysis to now what sounds like all parties interested in winning an exchange (or even making the discussion personal) vs clarifying the reality and standing on fact. Starting to sound a lot like the US political debates, isn’t it? We’ve seen this occur before and it is always right before a tumultuous time – people protecting their livelihood (understandably) as the
signs become murkier.

A strategic investor quickly begins to tire of the incessant polar ends of the debate and brings the focus back to reality – the drivers and influencers that support or move a market. They look at long term supply and demand issues, obvious lifestyle trends, costs vs. yields, income levels vs. sale prices, investor volume vs. end-users (homeowners). They take these and other factors to have an educated look at whether they believe that their money will work hard for them in the market or work harder somewhere else. They really don’t care about the arguments, they don’t get emotionally entrenched in a position; smart investors look for places to make their money work hard, providing them yield with high rental demand and possible long-term capital gain. They also understand that the polar ends of an argument are never right. The actual result always ends up being somewhere in between.

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Toronto 1% Vacancy Rate
The oft quoted 1% vacancy rate that gets thrown around for Toronto and Vancouver can be a very misleading number for investors or the general public to base the market on. This is a ‘snap-shot in time’ estimate based on a limited sample size in those regions (typically based on purpose-built rentals and a small sampling of private property/condo owners). That would be akin to taking a survey of a Pee Wee hockey team, asking them if they like hockey, and then claiming 99% of 12-year-old boys like hockey – not an accurate assumption.

Since identifying and calling all rental owners is next to impossible, the smart investor is paying very close attention to the on-line rental ad market for their target region/neighbourhood and property type. The rental market is an ever changing forum that shifts from month to month, if not week to week. You wouldn’t run a gas station by basing your price on what all the stations were selling for 3 months ago – you’d want to know what was occurring today. The point to take from this is do not base your rental decisions on older data. If you are basing or justifying your decisions on old or ‘snapshot-in-time’ data, you are adding a level of unnecessary risk.

A better strategy for keeping your finger on the pulse of your target market is to regularly review online ad levels for condos and suites for rent in the region. In hot markets like Toronto and Vancouver, you will often find that vacancies will be higher at the high-priced end (new condos) and very low at the lower end (older and resale condos).

Don’t just believe a number because it has been spoken about many times over and over. Always complete investigations yourself.

Toronto’s market will be cushioned by the new Super Visas (immigrants are able to bring parents and grandparents into the country) and the influx of students to well-respected universities in the city – both will bring a non-investor class (less volatile) purchaser into the market and will help soften the increase in property values. A shift from investor demand to end-user demand will occur, but we won’t see that overnight, hence the flux in the market over the period of 2013-2015.

Another ‘on the street’ analysis of the market is to see how many of the luxury condos (i.e. Trump Tower) are for sale and at what level of a discount they are selling. These listings will see an increase in the coming months and will be at a discount to the price that developers and early purchasers paid.

In the coming 2013-2015 period, the shift in downtown cores of Toronto and Vancouver will be away from the investor and more towards the end-user, but the end-user demographic will also be shifting. This shift will lead to mixed messages being projected by the market, adding confusion to those trying to decide whether to buy or wait.

The bottom line here is this: buyers looking for a condo in Vancouver or Toronto MUST have either a one year timeline (in and out quickly) or a 5+ year timeline as 2013-2015 will be a time of market gyrations as new and resale inventories fluctuate dramatically, foreign money begins to move out of the core areas and those Gen X and Gen Y folks who currently live in 800 square feet in downtown start building families and moving to larger suites in the suburbs, closer to schools and kid-centric amenities. This will lead to an increase in listings of the smaller one bedroom and studio units they first bought as entry into the market but have proven to be impractical for growing a family.

Market turmoil does provide opportunity for those who haven’t allowed themselves to get emotionally involved in the rhetoric, headlines or mixed messages. Get the facts, look at the real numbers and educate yourself. Sophisticated investors are exponentially more successful. Never believe a number just because it has been repeated many times. Follow the key drivers and the market influencers that make up the Canadian Real Estate Cycle. If you do so, you will do well; if you ignore them and ride the emotional wave, you have a very good chance of making poor decision. Remember this at all times: without positive cash flow, it is not an investment – it is just pure speculation.

To your success!

Big City Condo-monium Turning Into Pandemonium? was last modified: May 25th, 2012 by maddy

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