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Which Canadian property markets are most at risk?

May 22, 2012 Investment Condos, New Toronto Condos & Lofts, Planning & Development, Toronto Condos, Toronto Real Estate

Ben Rabidoux – Globe and Mail

The oft-repeated axiom in real estate is “location, location, location.” Even housing “bears” recognize that there is no such thing as a Canadian real estate market. Granted there are macro factors that affect all regions equally, most notably the cost and availability of credit, but regional markets vary widely in terms of their fundamentals and, by extension, their vulnerability to a price correction.

The two markets that currently concern me the most are Vancouver and the Toronto condo market. Here’s why:

Vancouver – edited out as it does not matter to readers of this blog

Toronto

The Toronto condo market concerns me for a very different reason. While prices have also outpaced fundamentals, most notably rents, what concerns me most is the potential inventory in the pipeline at a time when existing inventory is quite high.

Comment: Yet again, prices as compared to rents, are moot. Like comparing Kiwi fruits to house cats. But if you take the average house price at current mortgage rates, you get a monthly payment of around $2,200. Similar to many 2-bedroom condos. So, with the right down payment, a renter could easily make the jump to home ownership. That is the measure that matters – and it shows housing to be very affordable.

Condo starts in Toronto have been very high over the past few years. There are currently 53,000 residential dwelling units under construction in Toronto, an estimated 48,000 of them are condos. Condo research firm Urbanation recently noted that there were 15,554 unsold Toronto condo units at the end of March, an increase of 27% annually. They further estimated that if current trends persist, that number could approach the all-time high later this year.

Comment: Past few years? Try almost a decade. In 2006 there were 129 condos under construction – not much less than the 143 we have now. This did not start yesterday, as many would have you believe. Not sure why anyone cares about unsold units. They will sell one day. And if you see a crane, that means that the project has at least 70-80% of their units sold.

With this much inventory in the pipelines, strong demand for new units is essential to absorb this inventory without adversely affecting prices. However, the majority of new condo units are currently being purchased by investors and not end users. This is quite concerning considering that most new condo units in the GTA do not generate enough rents to cover ownership costs for investors, meaning they are cash-flow negative.

Comment: There are at least 50,000 new households forming in Toronto every year, and they all need somewhere to live. Be it a condo, a house or a condo to rent. With about 28,000 condos completing every year, it leaves over 20,000 families needing homes. Do not worry about demand, it is strong and pent-up and will last for a LONG time.

And to imply that condos do not generate enough rent is preposterous. A $300,000 condo with 25% down at 3.29% and amortized over 30 years (with $1,800 annual property taxes and $280 condo fee) costs $1,420 a month for an investor. They would likely get $1,600 for that unit. Even with 20% down and taxes of $2,000 and condo fees of $350 it still only costs them $1,576 a month. It is EASY to cover costs with rents, which is why people are doing it. Trust me, I help investors buy condos all the time… And with a vacancy rate around 1.3% there is a steady supply of tenants.

What this implies is that many investors are banking on continued strong appreciation in these units to make any money. This raises two enormous questions:

Comment: Your presumption is wrong. Price appreciation for new condos is almost flat, investors are not looking at that. They are looking at 10-15 years of tenants paying the bills and having $200,000 in equity.

1) If the price of Toronto condos stagnates, will these same investors still line up to purchase new units? If not, how will all that unsold inventory affect the supply/demand balance?

Comment: Yes, the prices are stagnating and they are still buying. Unsold inventory is moot.

2) How will current investors react if their expected capital gains begin to vanish and condo prices languish or even fall and remain suppressed? Will they continue to hold their cash-sucking “investment” or will they sell out, adding more inventory onto a weakening market?

Comment: The gains do not vanish as long as the condo market continues to be the rental market. It has been for years, it will continue to be. There are no new rental apartments being built, so there is no other option. Toronto is 50% renters, they all need somewhere to live… at least 25,000 new rental units are needed in the GTA every year.

On this front, the latest resale data should concern us. The headline 10% increase in Toronto house prices is being largely driven by the detached segment while condos are beginning to lose steam and have largely moved sideways over the past year.

Comment: Like I just said. Condos are up around 4%, houses about triple that.

The bottom line is that no one reasonably expects the potential fallout of a housing correction to be felt equally across Canada. Some areas are far more at risk than others. The message for new buyers contemplating jumping into home ownership in these riskiest markets should be clear: Tread lightly!

Comment: And be sure to do your homework and know what you are getting into. Do your own research, read all the numbers for yourself. Do not take my word for it – and especially not the press!

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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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When rent money isn’t dead money

April 20, 2012 Buying Real Estate, Miscellaneous

Carolyn Ireland – Globe and Mail

Bay Street money manager Ming Lam isn’t against home ownership – he’s just against ownership at prices that he thinks are higher than they should be.

Comment: What he THINKS they should be? So this is all based on what he THINKS? Not reason or logic, data or statistics? That is one way to get in trouble… No human opinion is higher than the truth.

He admits that this view often leaves him standing alone at cocktail parties.

“You just bought a house? Are you nuts?” is a sure conversation stopper, he agrees, laughing.

Mr. Lam has been bearish about Toronto’s real estate market for years and he cautions that people who think buying a house is always a good investment may not fully understand the costs.

Comment: And yet, those who bought 5 years have seen their home’s value double. Bad idea… I know…

A principal at Silver Heights Capital Management in Toronto, Mr. Lam is an avowed renter. He knows there’s an emotional element to owning a house but he has an emotional attachment to making money.

He believes people are too quick to plug some numbers into a mortgage calculator to see what house they can afford compared with how much they might shell out in rent. Often they go into denial about the taxes, depreciation and maintenance.

Comment: But houses in Toronto do not depreciate. Anyone who has bought a house in the past 20 years has seen the value go up. In fact, but for a brief blip in the early 1990s, prices have always risen. In 1966 the average sale price was $21,360 and last year it was $465,412 – ’nuff said. Taxes are LOW in Toronto. The average house pays about $225/month (using the average of $500,000 for both condos and houses, sampling 41 properties for sale in the downtown core). Maintenance is maybe 1% of your home’s value per year – a fair trade for the 8-10% in value you get annually. The average house, at $500,000 with a 5-year rate of 3.29% and 30-year amortization costs $2,333/month for mortgage and taxes – with 5% down. It takes $90,000 income to qualify. Really not a big deal!

A property tax rate of 0.8% on an $800,000 property is $533 a month, he points out. In addition, owners have no choice but to make major repairs such as replacing the roof or installing a new furnace. He thinks a realistic estimate is about three% of the value of the house per year.

Comment: Huh? The taxes on most houses is certainly not $6,400/month. What the price is is NOT what the appraisal is. And is thus not what you pay taxes on. I love people who are wrong, they use the fuzziest math in a attempt to prove a point that is wrong to begin with. There are 27 homes for sale right now in Toronto’s central districts (C01-C15) in the $790,000-810,000 range. The average taxes are $4,300 per year. Do the research before you speak, that is what I do!

Once those sums are paid out, the amount available to put towards the mortgage is drastically reduced, he argues, and makes renting the more attractive option.

Comment: But renting gets you nothing, that money is essentially thrown away. If I pay $2,000 a month on my mortgage, plus $500/month in taxes and $5,000 per year in maintenance (which is WAY too much) – I don’t care because I am making $50,000 per year on my $600,000 house. After 10 years I can sell it and put $200,000 in my pocket. If Mr. Lam moves, he gets… nothing.

Mr. Lam recognizes that he possesses something many homeowners don’t: The acumen to invest in assets other than real estate. In other words, he can take the money that he saves by renting and funnel it into stocks and other investments.

Comment: And I can also invest in the same things. He also has housing costs, as do I. We both have discretionary income after that that we can do what we want with. Just my housing money is not being wasted, like his.

Many people would plow the money saved into Caribbean vacations if they didn’t have the forced savings plan that a house provides.

“If you don’t have the discipline to save and invest the money from the cost savings of renting then buying a home might make sense for you even if house price levels are higher than average,” he says.

Comment: High than average? What average? That doesn’t even make sense. More of the fuzzy math to justify a point that is wrong.

He says there are lots of barometers people can look at to determine whether real estate in Toronto is expensive or cheap right now, but in his opinion house prices and income levels should have some correlation over long periods of time.

Comment: They do, in monthly costs. The average rent on a 2-bedroom unit is around $2,200 a month. Not a ton more than the mortgage and taxes cost on a $500,000 house. That is the correlation. Trying to tie rents to purchase prices makes no sense, it is all about what people pay every month.

“Generally speaking, I think that the average family should be able to afford the average home,” he says. “It’s a simple litmus test and one that I think most people would agree with.”

Comment: The median income in Toronto in 2009 was $66,790 and the average house price was $395,460 in the same year. With 20% down, they could afford it at the rate of 4.19% available then. And those are just averages I pulled from TREB and StatsCan (and this simple example does not take into account that the bottom chunk of income earners tend to rent, not buy, so they skew the income figure down – for actual buyers, it would be higher). But, if we take the numbers from a large mortgage broker – CanEquity – we see that in Toronto the average household income on mortgage applications is $125,000 and the average home loan is $262,000. That shows that the average family can EASILY afford the average loan they are getting. With a 5-year rate of 3.29% and 25-year amortization, the monthly payments on that are $1,279. Add in another $1,000 for taxes and maintenance and you are pretty much bang-on the $2,200 the average 2-bedroom rents for. But the rent money is gone, the house is worth something. Like leasing a car vs. financing – one you own at the end, the other belongs to someone else.

He’s not sure that Toronto house prices pass the test right now with a ratio of something like seven to one. Low interest rates are driving the “affordability” of real estate, he adds.

Comment: Ratio of 7 to 1? What ration? Seven of what? One of what?

He doesn’t know what interest rates will do in the future, but he thinks potential buyers should be stress testing their notions of what they can afford. What if interest rates were 4% or 5% higher?

Comment: Rates will rise, we all know that. But to suggest that they will rise 4% or 5% is just stupid. Anyone with any sense – and Mr. Lam claims to know a LOT about money – knows that that will not happen. That would put posted bank rates over 10% – a rate we have not seen for 20 years. More fuzzy math… Real math is that if rates rise 2% then monthly costs on a $500,000 mortgage would rise by $500. Not chump change, but not enough to bankrupt the average homeowner.

“I’d certainly want to know how it would affect my finances – just in case.”

Comment: Why? You rent, it does not matter. But to quote a BMO survey from March: 57% of Canadian homeowners say that they could still afford their home if interest rates were to climb by 2%. However, 20% indicated that a 2% rise in rates would hamper their ability to afford their home; 23% indicated they were unsure if a rise in rates would affect them. There you go, many Canadians know how it would affect their finances. And most are not concerned.

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Contact the Jeffrey Team for more information – 416-388-1960

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Living the loft life in Toronto

December 29, 2011 Toronto Loft Conversions, Toronto Real Estate, Toronto Soft Lofts

For many, moving to an urban apartment is about tapping into the excitement and cultural opportunities of the big city and can also mean a shorter commute to work. But finding a place in the city can mean sacrificing the larger living spaces found in the suburbs or country. Increasingly, urban dwellers are finding that loft apartments offer the location and opportunities of city life with far more space than average condos or apartment homes. What’s the idea behind lofts, and why are they so popular?

Lofts have a certain allure. With high ceilings, open floor plans, rough-hewn floors, and brick walls, they are a hip housing alternative for many urban professionals. Today’s loft dwellers embrace new-age metropolitan living in all its glory.

Those who buy these unique dwellings have shaken off long daily commutes, granting them more personal time, more cultural and entertainment possibilities and an active, city lifestyle. If you crave something eclectic, out of the ordinary and convenient to all the city has to offer, a loft may be for you! Select from newly constructed (soft) lofts, or restored historical building loft conversions (hard lofts).

One definition for a loft found on the Web is — An appeal against convention- convention in thinking, convention in building and convention in living. They are a celebration of open concept living and unconventional spaces brought about by the considered application of imagination and a rejection of mass-market housing.

The origin of the word loft comes from the Old Norse lopt which means “upper room “or “air”. In 19th-century English usage the word came to mean “the upper stories of a warehouse or factory”. The modern boom in the conversion of such spaces into living areas came in the 1940s in the SoHo District of New York City. By the 1970s so many of these conversions had been done that the city was forced to re-zone the area to make such conversions legal.

By the 1980s the concept was spreading first across the United States and then to Europe and Asia. As the trend grew it caught the attention of developers identifying a new market. Developers being developers did not let a lack of owning an existing warehouse or factory building to convert stop them from moving into the new market. Thus the new word loft began to be applied to units in ground up new construction. Needless to say the term grew fuzzy.

By 2005 the term loft has matured. Lofts created from spaces in existing buildings are called hard lofts or true lofts. Lofts built new from the ground up are typically referred to as soft lofts or new lofts or loft-inspired or mezzanine suites. Whether created out of an existing building or built ground up new, all lofts have certain common elements or they are not lofts.

Lofts are part of the Postmodernism movement in architecture. Postmodernism is a counter- reaction to the strict and almost universal modernism of the mid-20th Century. It embraces elements from historical building styles incorporating them without a rigid adherence to one style. It also does not as policy try to hide the structural or mechanical elements of a building but often uses these in the design.

What is a “hard” loft?

A true loft is a conversion of a vintage factory or warehouse. They have a harder edge as they are usually constructed of concrete or “mill” construction of exposed brick, original wood posts, beams and floors. Typically, these lofts have an open floorplan and unfinished ceilings that are at least 10′ high with exposed ducts, plumbing and electrical. Examples include the Merchandise Building, Liberty Lofts and the Toy Factory Lofts.

What is a “soft” loft?

In recent years developers have built new buildings with some of the characteristics of a hard loft such as high ceilings, big windows and open floorplans. These lofts typically have a softer edge… no exposed ducts and plumbing, carpet in some areas and upscale kitchens and baths. Soft lofts have more in common with traditional condominiums than a true hard loft.

What is an “artist live/work” loft?

Toronto bylaws allow for the development of buildings with “artist live/work” zoning. The first of these developments appeared on Shanly Avenue (near Queen and Gladstone) and most featured minimal finishing, 16′ ceilings and steel frame construction. The City’s zoning restricted their use to people who were engaged in a precisely defined list of artistic activities. Over time these buildings have come to be occupied by people who simply enjoy the loft life.

Here are some of the unique joys of the loft life:

* Industrial buildings – The term loft began in New York and Chicago when renters and owners began turning old industrial buildings into living spaces. The original tenants were artists who craved the high ceilings, large windows and open floor plans typical of converted warehouses and factories.

* Open spaces – The primary benefit of loft living is the large open spaces that allow you to live and move how you want, rather than having your movement defined by a permanent floor plan of walls, doorways and rooms.

* Define your areas – In a loft, the floor plan can be fluid and ever changing. You can set up a sleeping area in one part of the space, then move it somewhere else if you have guests or if you just need the area for another use. Kitchens and bathrooms are more permanent, of course, but temporary partitions, hanging curtains, or even changes in floor covering can define other spaces.

* Eclectic style – Another nice aspect of many lofts is the opportunity for eclectic design and decorating. For example, a loft might feature soft, delicate window treatments on reinforced factory windows, or a modern couch sitting on a hundred-year-old hardwood floor. This mixture of old with new and practicality with comfort can form a wonderful esthetic that makes the most of a loft’s mixed-use nature.

Regardless of the type of loft, all lofts should have certain basic common elements:

* Open, flowing floor plans
* Minimal uses of interior walls to define space and doors to close off areas
* High ceilings – some definitions set minimum ceiling heights at twelve feet or it is not a loft just a condo with high ceilings
* Exposed piping, ductwork, structural elements
* Large windows
* Access to the sky often with roof top gardens or decks
* Easily merges living and work space, blurring the lines between workplace and residence
* Mixes traditional mediums with modern finishes- concrete, metal, stone, brick, wood used freely alongside of drywall, ceramic tile and viny

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Contact the Jeffrey Team for more information – 416-388-1960

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Laurin and Natalie Jeffrey are Toronto real estate agents. We would be happy to help you find your new Toronto home — be it house or condo or loft. We would also be more than pleased to help you sell your current Toronto property.

Century 21 Regal Realty Inc. Brokerage
1332 Queen Street West
Toronto Ontario M6K 1L4
Office Phone: 416−849−5360
Office Fax: 416−849−8987

Laurin Cell: 416−388−1960
Laurin Email: laurin@jeffreyteam.com

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Natalie Email: natalie@jeffreyteam.com

The vast majority of content on this blog is not written by Laurin or Natalie Jeffery. It is written by many different authors, for many different publications and websites.

We re-print these articles here as a collection of Toronto real estate news and information. We aim for this blog to be a one-stop shop for people looking for information on Toronto real estate.

We do not claim any of the information we did not write as our own. We do not work for any publication, nor any builder. We are Registered Real Estate Sales People working for Century 21 Regal Realty Inc. Brokerage.