Cash tight for T.O. condo market
Myke Thomas – Calgary Sun
The purse strings are being drawn tighter for some new condominium developments in Toronto, just two months after Finance Minister Jim Flaherty expressed concerns about apartments in Canada’s biggest city.
According to canadianrealestatemagazine.ca, lenders are no longer rolling out the red carpet for Toronto condo developers; they’re rolling it up and “locking the vault when individual condo investors come to call.”
Comment: Well, no… Some projects are not getting financing. Anything from a new builder or a questionable development, they might have trouble getting money from the bank. But Concord-Adex, Tridel or Monarch can still get what they need because of their name and track record.
Recently, Equitable Trust reported a $63 million drop in originations for its commercial division because its appetite for Toronto condo development is virtually nonexistent.
There is a great fear, and not just in the finance minister’s office, the GTA is on the verge of a market correction — meaning prices will fall with an oversupply of units, as has happened in the Vancouver area, which has seen a drop in sales volume and prices.
Comment: But we do not know for sure that Vancouver prices are dropping because of an oversupply of condos. Since house prices are also dropping there, it is safe to assume it is something else. And their prices were 35% higher than ours – with different demographics, housing stock and market motivators. Comparing it to Toronto is as bad as comparing Canada to the US – like apples to Audis… not the same. And Toronto is NOT oversupplied. With 28,000 condos coming online and 100,000+ people moving here every year, housing is still in short supply. That is why decent houses have been getting 10 offers each for years now.
Financing a condo development in the GTA has already been restricted — many developers have had to meet pre-sale targets between 70% and 80% in order to get the cash to bring in construction crews. Just a few years ago, the standard for pre-sales was 50% of units available in a project.
Comment: NO. It was not. It has ALWAYS been 70%. That is simply wrong. Some projects are at 80% now, if they are on the bubble. And downpayments must be in the 15–25% range, depending on the lender and how much the builder has in the bank. That is one of the reasons our condo market is solid. If a project launches with 300 units, the average price is around $360,000 (which is a resale number, new is likely higher). So they need say 75% of units sold with 20% down – that is $16,200,000 paid out by buyers before the crane goes up. If it is $400k per unit, with 80% sold at 25% down then the vote of confidence is in the $24,000,000 range. Then the bank – notoriously stingy – funds the rest. With 140 some-odd projects on the go right now, that is $3–3.5 billion in cash laid out to get these projects off the ground. That is a lot of money propping up the Toronto condo market – and it is not going away any time soon.
By slowing the flow of the dough, banks, other lenders and investors hope to reduce the size of the correction they have no doubt is coming due to the market creating more rental units than can be absorbed and a glut of units for sale — both new and resale — that can only bring down prices.
Comment: Show me a mechanism for this correction. No one can. But I have 10–15 solid reasons why we have the current market situtation and why it will continue.
Luxury hotel condos are part of the financing dilemma.
By the end of this summer Toronto will have four towers in a city where a red-hot market has brought rising concern about a real estate bubble.
Comment: There is no bubble. Price growth in the 2–5% annual range after inflation is NOT a bubble. The 127% in 15 months back at the end of the 1980s, now THAT was a bubble.
The granite-and-glass towers, including two of Canada’s tallest residential buildings, are opening in quick succession, adding hundreds of hotel rooms and more than a thousand condominiums just as Canadian housing hype hits a fever pitch.
None of the four projects has sold out and the push by developers to sell their remaining units before a resale market kicks in has the feel of a ticking time bomb.
Comment: That is just bad timing, flooding the market with a lot of units that have a small client base. It has nothing to do with a correction or bubble.
The business structure means buyers of the units are subject to commercial tax rates rather than lower residential rates, and the bar for financing is higher.
Comment: And the folly of condo/hotel combos is a whole other story. Look how well that went at 1 King West…
“There were some units that had $20,000 (annual) property taxes for an $800,000, or 1,500 square foot unit because it was zoned commercial. So lenders wouldn’t touch it,” said Callum Ross mortgage consultant Jason Friesen.
Comment: And I have heard tell of larger units with $80,000 property tax bills – and condo fees half as much.
Bankers and investors from across the country will be closely watching the scene in Toronto — new financing models there will no doubt make their way across the country.
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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