Toronto new home sales tank….condo sales soar

The Toronto market continues to defy logic.

After tanking 32% in September, we find out that Toronto home sales managed to eke out a 0.6% gain over last October.

New home sales up in GTA

Yet in a bizarre dichotomy, the actual breakdown of that stat reveals a jaw dropping rise of 27 percent in new condo sales being offset by an equally staggering 32% drop in new lowrise home sales.

As the article notes, seven out of ten new homes sold in October were condos.

How does one account for this?

Well, the article above actually gives some hints:

Clearly investors are still active in the property market,” said housing analyst Will Dunning. “It remains to be seen how this will all play out.”

I’ve got some thoughts on how this will all play out.  First of all, it’s not investors who are active in the property market.  Investors seek cash flow primarily.  Capital gains are an afterthought as any rational investor knows that the housing market can move up, down, or sideways.  What we’re dealing with here are a bunch of speculators snapping up condos at the tail end of the boom.

This piece from the Globe suggests that 40% of condos sold in Toronto are sold to ‘investors’.   Yet the average Toronto condo will fetch about $307,000 The average rent for such a condo is roughly $1400 per month.

Assuming the investor put down the required 20%, it would leave a total mortgage amount of approximately 245,000.  At the low rental financing rate of 3.5% financed over 35 years, the mortgage payments would be about $1000.  Add in condo fees and property taxes, and subtract the lost opportunity costs from the 20% down payment and you’d essentially be looking at subsidizing someone to live in your own unit.

Some ‘investment’.  Do you think people will continue to hold these condos at a loss every month if the illusion of capital gains starts to become questionable?  Real estate booms supported by speculation never end well.

“But some empty nesters, particularly from areas such as China which are extremely active in the Toronto market, may not be as sensitive to local market conditions and are looking for long term appreciation”

Ah…so now it’s not rich Asian investors, but rather rich Asian empty nesters looking to capitalize on ‘long term appreciation’.  The ‘rich Asian’ bit is getting awfully old.

“The more affordable condominium sector has taken off because low rise homes have been priced out of the reach of many buyers. Investors meanwhile, continue to be attracted to the relative stability of the Toronto market.”

Yes it always bodes well for the future of real estate when the average family income can no longer support the average home price….and with record low interest rates to boot.

“New condo sales are also expected to give up share to the resale market because of the large number of completions…Buyers will take advantage of the increased selection and improved negotiation power for existing units.”

Well at least they got that part right.

Toronto has a love affair with condos.  So much so that developers have projected such demand into the indefinite future.   Toronto is North America’s new condo capital: Last year, developers completed about 16,000 units, twice as many as in New York (a city with 4 times the population) and three times as many as Vancouver.  As of right now, according to CMHC, there are over 34,000 units near completion in the GTA.

So let’s do the math:

Overbuilding + rampant and unsustainable speculation + a weakening overall market = ?

Well if you’re Ian Lee, you might say it equals a flat market.  Those with a PhD in common sense might think otherwise.

-Ben

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2 Responses to Toronto new home sales tank….condo sales soar

  1. Andrew M says:

    Looks like Toronto is doing great!

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