Thursday, 24 July 2014

The Return of the Condo

It goes back as far as 2004, the crash talking on Toronto real estate. At first, this was just a few naysayers, but once we cleared the 2008 recession, this group grew louder and more insistent. Only two years ago, a Toronto Star headline declared that real estate prices in Toronto will fall 20 -25% based on RBC's official prediction for 2012. And we can see that this has not been the case. If fact, it has grown by that much or more in many neighbourhoods.

The crash talk has been particularly amplified for the condo market. Fewer new houses are built in Toronto these days so there is not a lot of additional product being added to the mix. Condos have exploded in number, not only in the past few years, but going back 40 years.  In 1971 condos accounted for 2% of Toronto housing. Today, it is 28% of Toronto housing. And when all of the current projects are built, it will be closer to one third.

Condos have not risen in price as much as houses have. In some parts of the city, a few condos have even dipped in price. 2013 and 2014 were supposed to be the years where so many new condo units entered the Toronto market that prices should have begun to fall. Too many units and not enough buyers send the prices on a downward spiral.

But it's not happening. The question is: Why not?  And why is 2014, the supposedly worst year for Toronto condos, turning out to be the best so far in the 2010s?

Well,  some of it has to do with how many investors are handling their condo units. Often, when a condo market starts to slip, a large number of investors try to dump their condo investments so they are not caught with a condo that has fallen tens of thousands of dollars in value year over year. When the crash talk started happening and condo prices leveled off in Toronto, the idea of investors dumping their condos didn't happen. Investors held on to their condo units and rented them out because rents in this city have risen over the past decade as well, and they are making money off of their investments.

Another reason: new condos are not pricing themselves as high as they once were. Not too long ago, the gap between resale condos and new condos was much larger than it used to be to the point that new condos felt a tad overpriced. I would certainly not have recommended a purchase to my clients. Now, the gap has closed. New condos average at $549/sq ft and resale at around $519/sq ft. New condos are offering strong incentives to attract buyers. Resale condos are showing some gains in price in certain condos and the number of condos sold has increased from last year.

The biggest reason for the sustainable condo market in Toronto has to do with the demographic shift in the city's core. Adults aged 25-40 are seeking downtown as a place to live and work much more than their parents ever did. We are even seeing the arrival of young families in the condo world in much larger numbers than ever before. High density neighbourhoods downtown are scrambling to keep up with child care facilities, schools and parks where children can play. Some parents are even grouping together to form play dates in their condos outdoor amenities. Then there is the retiring set. Tired of the yard work, they want an easy-to-take-care-of condo within a walkable distance to restaurants and grocery stores and a little entertainment.  Because of all this, the downtown core is still a strong area to invest in the GTA. It is currently showing some of the best returns this year in the GTA condo market, though you still have to pick your condo wisely.

So, for those of you that have ever been beaten down by the barrage of grim media and institutional predictions from the past decade on this city's condos, it may be time to set the worry aside. I don't claim to know where the condo market is going. Predicting can be a dangerous sport. Still, the current indicators are saying that the Toronto condo market is not so bad.  2014 may even be a healthy condo year in Toronto instead of the year of the condo crash.

Thursday, 17 July 2014

Are Auctions Better Than Bidding Wars?

Most people in Canada associate auctions with art, your grandma's antique dresser, or maybe some cattle. Lightning speed auctioneers take bids working the crowd up into a frenzy until they have reached the highest bid for that prized item. In some U.S. states, a few areas in Canada, and in countries like Australia, an auction is also a way to sell your home.

There are many ways to auction a property, but generally an auctioneer has an opening bid or some may even have a minimum starting price they are willing to accept before taking higher bids. This style of home buying doesn't have to happen at an auction house. In Australia, it can happen at a brokerage or even at someone's house. Not every property goes to auction. Like here in Canada, it would only attract the kind of houses that would likely draw in multiple offers in a given market. Recently, there has been more of a push for Canadians to adopt this Australian way of selling properties. Why? you may ask. Is there something wrong with how we sell properties here in Canada?

Well, some buyers feel that there is something wrong. They do not like the secrecy with how bidding wars happen in in-demand cites like Toronto. An auction is different and more transparent.  In an auction, you may start the bidding off for a house at $750,000. Let's say you have several bids and the highest bidder lands on $825,000 to buy this property. No one at the auction is willing to go higher. All buyers know exactly how much the seller will be receiving for the house, and they have decided not to go higher.

In Toronto, we often hold back offers until a certain day where we present the offers to our sellers. We may list the house at $750,000 and receive five offers. The difference here is that none of the five buyers know what the other buyer has offered. So, the top bidder may be $80,000 higher than the second place bidder. In an auction situation, the top bidder would know all of the other bids as they roll in.

Now, the auction system does not necessarily mean you will have lower bids resulting in a lower sale price. In fact, the adrenaline of the auction has been known to boost prices higher than market value. Sydney, Australia does, after all, have higher prices than here in Toronto.

Still, there is a transparency there that may put some of the buyers at ease. Some will argue that they don't like to have others know what they are bidding on a property. Canada is a place that does value privacy more than other countries, even in this day and age where privacy is becoming less prevalent.

At the end of the day, there have been very few auctions here in Canada as far as real estate is concerned. I don't think it will threaten to change the current Canadian system of selling real estate any time soon. It's true that trends in real estate can change quickly, and we may find ourselves auctioning off our houses in the future. If buyers become more frustrated with our current system of handling multiple offers, then auctions may be selling off more than a prized heifer or a signed space helmet from Neil Armstrong.

Thursday, 10 July 2014

Hardcore Renters

Recently, I have learned that renting an apartment can be as tough as buying a place in this city.   As a landlord,  I did minimal advertising for my main floor, recently renovated, one bedroom apartment in a house with no tenant parking in a west end neighbourhood. The response to my ad was the best I have ever had in my 10 years of being a landlord. Usually around 10 - 20 % of the folks who go through to see a given apartment express an interest. I had everyone who came through fill out an application form. I think the rent was set near market value, but I had folks offer me more than I was asking. No doubt it appears that the rental market can be competitive in this city. I had to pick from some pretty magnificent renters to the point where I felt bad telling certain people they cannot live in my available apartment. 

As a real estate salesperson, I'm overwhelmingly associated with buying a property, but there are some circumstances where it may be smarter to rent than to buy. If, for example, you are not sure if you will be staying in Toronto for a longer period of time, then you should probably rent. Maybe you are arriving in Toronto for the first time and you want to get to know the city neighbourhoods a little before buying. Then by all means, rent.  And it's possible that you don't like the stress of home maintenance or maintenance fees. Then you should be a renter.

Still, those are not the renters I usually come across. I come across the hardcore renter. Those who have the means to buy but who just don't want to pull the trigger. Some are concerned the market will crash. Many will say that they can find more space in a better location if they rent than if they get a mortgage. And to a certain extent, they're correct. However, over a ten year period, your rent will likely increase, and the principal on your mortgage will decrease. In other words, the unit that cost $1800 now to rent, may cost $2500 in 10 years. There's a very good chance it will cost more than your mortgage.

And then there are those who argue that they make more money by investing with a financial advisor in stocks or bonds instead of real estate. And though the returns have been weak for those investments over the past twenty years on average, I suppose there are still some out there who can rent and invest their money wisely. Not all equity is built in real estate. There are other options out there.

But let's be honest. Most renters are not avid savers.  When buyers purchase a property, they do pay a lot of their mortgage payment to interest, but a portion of their payment builds equity in their property. So, you are building equity instead of giving your landlord the money. And I'm a landlord. So, thank you renters.

Also, most renters who have been renting for forever and have the money to buy a property have some anxiety around commitment. Not to their significant others, but to committing to stay in the same place for five or more years. They may have rented the same place for 20 years, but they still don't want to have the responsibility.

My point with all this: Sometimes you have to rent. You don't have the money yet. You're retiring to make your life easier. You're not ready to commit to a long term plan or you are not planning on staying in Toronto. But if you do have money and you can get started, buy. If I could have bought earlier than I did, I would have. Sure, your place may feel smaller or further away than when you were a renter, but with enough time, you will have a nest egg and you'll be astonished at what some people pay in rent in future Toronto.