INSIGHTS

Home Buyers Face Financial Ruin

Published on 19th April 2018

In last week’s Insight Article, I broke down the headline, “Condo owners make big gains, but nearly half aren’t making enough rent to cover costs” with a more bullish perspective and provided real-life examples of my client’s pre-construction deals that are raking in some serious returns. If you missed last week’s Insight Article, you can check it out here: “Money Made In Pre-Construction Condos!”

The Bearish Perspective – This week’s Insight Article will provide the opposite perspective – the bearish analysis of the headline, “They bought their pre-built homes at the market’s peak. Now they face financial ruin.” At the end of the Insight Article, I’ll provide you with the inside scoop on exactly how one particular builder is pricing their new homes for sale.

The bearish headline above is actually comprised of 3 separate articles that were talking about the same underlying story. As with most viral headlines, there is always a human story attached to it. When I read these articles, I also empathize with the buyers as well (as intended by the writer).

Where It All Began – All of this publicity stemmed from the article where Mattamy, a very reputable builder, reduced their prices on the second phase of their Queen’s Commons development in Pickering. One buyer was upset that she paid $60,000 more (Original Purchase price was $955,000) one year ago when the market was strong, compared to the newly released second phase prices during a time when the market for detaches in the 905 is weaker.

Three Buyers, One Fight – The story continues where three buyers of Mattamy’s Oakville Preserve subdivision had challenges closing their detached homes this year. Of the three buyers, two were expecting to sell their current house (at last year’s price) in order to pay for their newly built home. However, the current valuation of the homes they are trying to sell is much lower now since the market has slowed down compared to last year. The third buyer was a newlywed couple who was apparently saving up for their entire lives by living in their parent’s house prior to this pre-construction purchase.

So now, as a result of the market being softer for the 905 freehold homes, these buyers are apparently all in “financial ruin”. I put financial ruin in quotation marks because based on my understanding of the situation, they suffered a loss but it’s not financial ruin. Mattamy’s public relations must be working around the clock right now dealing with such bad publicity; they must hate the Toronto Star writer who has put them through all of this backlash.

Sympathy Poll – Let me preface my analysis by saying that I completely empathize with these buyers. However, there are reasons why I draw the line at empathy and nothing more. As with the example poll illustrated below, it looks like 25,122 people don’t have much sympathy towards these buyers.

Capping the Downside – The biggest difference when buying a personal home and an investment home is that with an investment, your tenants will be paying for the mortgage. On the other hand, with a personal home, you will be paying for the mortgage. So you definitely want to cap the downside when it comes to your personal home because finding a good tenant is easier than significantly increasing your salary.

Turning Tables – For the Mattamy’s Queens Commons home buyer who paid $60,000, or 6.7%, more than the current price of phase 2, it’s unfortunate but at the same time, it is fair. Nobody seems to think about the flip side of the situation when this happens because the media doesn’t write about it.

When you buy pre-construction property and the prices increase (like it has been in the last 8+ years), you’re sitting on massive equity from appreciation before you even own the property. In these scenarios, the builder doesn’t ask the purchaser to increase the original purchase price upon closing to get some of the appreciation back.

Additional Thoughts – For the Queens Commons buyer, I would recommend closing the property and paying the $239/month mortgage payment difference because her property will increase in value as GTA intensifies over the course of the next 5 years.

For the two Oakville buyers who have bought 1.2 – 1.6 million dollar homes but are worried about closing, I find it hard to believe that they are in financial ruin. Yes, they may have to sell their existing property for less than expected. However, unless they bought their existing property last year at the height of the market AND this current pre-construction home concurrently, I suspect the equity in the existing home is massive.

Although the OFSI-B20 rules have made it more difficult to close with a prime lender, they shouldn’t have pushed themselves to the limit where closing with an alternative lender at a slightly higher interest rate would put them in financial ruin. Perhaps they didn’t cap their downside.

The last buyer, the newlywed who saved up by living at their parents’ home are in the best situation. If you don’t need to sell a property to close on this Oakville home, then you’re set. As far as I know, if you were previously pre-approved for your purchase, you are still approved as many banks grandfathered it in for buyers. The only hurdle is if the appraisal comes in lower than expected; nothing crazy to freak out about here though. This feels like a story just thrown in for dramatic effect.

My analysis may sound a little bit harsh by analyzing it from a bearish perspective, but it was part of the exercise.

I truly hope these buyers can figure it out. As a buyer, whether you’re investing or buying for personal use, make sure you cap the downside. Make sure you work with a good mortgage agent or broker who actually knows what they’re doing, making sure that you’re not stretched too thin (P.S., if you need a good mortgage broker, I can pass along some great contacts).

Massive Price Drop for Newly Released Project – As many of these freehold builders are pivoting their prices and secretly trying to keep things under wraps, one particular project in Markham saw a major price drop compared to the prices from their first phase in the Spring of last year. The Abbey Lanes Phase 2 sales event was last weekend and the prices were almost 30% less than what they were when they first launched 8 months ago. Take a look at the price list comparison below.

Crash, But Not Really – A 30% drop in prices is quite significant and is technically considered as a crash. But if all of these homes are still selling, is it really a crash in reality? I’ll leave that up to you for interpretation. What do I think though? This may have been the opportunity that buyers were waiting for. The pent up demand was like a hawk eyeing the supply, snatching it up as soon as the product made itself available. The buyers are definitely still out there.

The Wrap – So that concludes this two-part Insight Article on the bullish vs bearish perspectives on the recent real estate headlines. Every writer has an objective, and I certainly hope that my objective through these Insight Articles has helped you to be more critical in analyzing the headlines. Feel free to reach out to me if you need a second perspective.

Until next time, Happy Real Estating!
Zhen

Money Made in Pre-Construction Condos!

Published on 12th April 2018

Real Estate is such a hot topic these days that everyone in Toronto is so passionate it about, and I love that. What I love even more is the constant debate between the bears vs the bulls. For some context, bears are “bearish” on the real estate market and believe the market will crash, whereas the bulls are bullish on the market and believe the market is strong.

Grass is Greener on the Other Side? The bears vs the bulls real estate market debate reminds me quite a lot of the debate between Apple vs Android – both are great platforms for phones and they each have their own strengths and weaknesses. Having just switched from Apple to Android (Apple fans, please don’t hate me), I can see the merit for both. There are things that I miss about Apple (the ecosystem and how things run smoothly), but at the same time, there are a lot of things about Android that I like such as the customization and battery life for my super long days. I digress, this wasn’t what I was actually writing about!

The reason why I brought up the phone debate is that I can see the merit for both the real estate bears and the real estate bulls as well. Both have very valid arguments and it’s always good to take an empathetic approach and understand both sides before coming to a conclusion yourself.

Breaking Down the HEADLINES – Recently, two headlines that have taken a life of its owns are presented below and I wanted to give you a counter-analysis of them both to train your mind on how to actually interpret headlines. One counter-analysis will be slightly more bullish while the other will be slightly more bearish.

Headline #1 – Condo owners make big gains, but nearly half aren’t making enough rent to cover costs.

Headline #2 – They bought their pre-built homes at the market’s peak. Now they face financial ruin.

I’ve gotten a lot of questions about them both and they’ve been brought up in conversations quite a bit recently, so I’ll address the first headline in this Insight Article.

When I read the headline “Condo owners make big gains, but nearly half aren’t making enough rent to cover costs,” I was mind-boggled because to me that reads, “Condo investors get rich on appreciation but are cash flow negative.”

One mortgage broker was telling me how a lot of his “investor” clients have shifted their expectations from generating cash flow to just breaking even. Apparently, his “investor” clients are also willing to accept a monthly loss in order to gain the massive appreciation happening in the condo market right now. Needless to say, that point had me scratching my head even more. The term investor is in quotation marks here because these individuals who are incurring monthly losses on their investment property are not savvy investors.

Breaking Down the Real DEALS – A result of confusing headlines like this, I started to analyze 3 pre-construction deals that are expected to close within the next year in order to give you all an idea of some real life numbers.

In each of the 3 examples below, I’m going to give you the purchase price, the address of the condo, the layout and what the projected cash flow number is after mortgage, property tax, insurance, and condo fees. For privacy reasons, the unit number, and the purchaser will remain unknown.

Example 1#:
Grid Condo – 181 Dundas St E, Toronto
Purchase Price: $342,400
Purchase Date: August 30th, 2016
Projected Cash Flow: $326
Current Market Value: $480,000
Appreciation: $137,600 over 1.5 years

Grid Condo is scheduled to occupy in August 2018. I expect rent and condo prices to increase even more by the occupancy date. If my client leases the den as a second bedroom, the projected rent will be even higher!

Example #2:
The Met Condo – 7896 Jane St, Vaughan
Purchase Price: $332,900
Purchase Date: February 13th, 2016
Projected Cash Flow: $302
Sold via Assignment: $425,000
Gross Assignment Profit: $93,000
Yearly ROI: 34.4% over 2 years

This unit at The Met was just recently assigned. Purchasing the condo in the pre-construction phased yielded $93,000 in profits over 2 years, or 34.4% ROI. Pretty good for simply signing a contract 2 years ago. Even at the new purchase price this unit is just about to break even at current market rents.

Example #3:
Harbour Plaza – 88 Harbord St, Toronto
Purchase Price: $358,990
Purchase Date: November 12th, 2013
Projected Cash Flow: $402
Current Market Value: $540,000
Appreciation: $181,010 over 4.5 years

Harbour Plaza has already occupied. The tenant is currently paying $2,300/month right now during occupancy. Upon closing, my client will have positive cash flow of $400 per month and have almost $200,000 in appreciated equity. They will be able to refinance the condo’s mortgage and pull out approximately $80,000 in equity, while still being able to break even on cash flow with the rental numbers. This investment was a home run.

The Wrap – So when I see articles written about condo investors paying $500 a month out of pocket as a cost of their condo’s appreciation, it makes no sense. Those investors are clearly working with the wrong realtor who is recommending bad investment projects. Understanding how to evaluate each individual project is very important because not every pre-construction condo is worth investing in. Make sure you understand the game and not just blindly purchasing a pre-construction condo purely for the capital gains – that’s gambling.

If you’re interested in learning more about how to make the returns in the examples above, feel free to contact me at 416-436-9436 or Zhen@PrimePropertiesTO.com.

Stay tuned for next week’s Insight Article where I provide an analysis that breaks down the second headline, “They bought their pre-built homes at the market’s peak. Now they face financial ruin.”

CAUTION! More Unaffordable Times Ahead

Published on 5th April 2018

Over the long weekend, I made sure that I took a day off and made some time for myself to get some rest and relaxation. However, I somehow ended up a bit bored (admittedly, the life of an entrepreneur – always thinking about the business!) and started looking for something to do.

Long Weekend Reading – I decided to do some light reading, and by light reading, I mean picking up the Canada Mortgage and Housing Corporation’s (CMHC) 225-page report titled “Examining Escalating House Prices in Large Canadian Metropolitan Centres”. Perhaps you’re thinking that watching a movie would have been a better way to rest and relax. Not to worry, I did that after my nap (which was induced by this lengthy report). Luckily for you though, I have summarized the key points of this long report for you here in this week’s Insight Article.

Reading these government-issued reports is always interesting because they are written by a highly skilled team of mathematicians who actually use the calculus they learned in University to make a living. One of the charts that I stumbled upon midway through the report was rather interesting and I wanted to share it with you. I’ve highlighted this before in previous Insight Articles, but let’s take a closer look at this topic here.

Density Rankings – Given its rapid growth, Toronto is poised to become a major metropolitan city. The chart below from the CMHC report compares our density per square kilometre to other major cities.

Check out the table below. We are ranked #144 out of 281 metropolitan cities. We’re essentially right in the middle of it all. New York and Tokyo are 4 and 10 times, respectively, more dense than Toronto.

Population density is measured by the number of people confined to a defined area of land. The less land there is, the more people each square kilometre must hold. When a city runs out of land and must build vertically to accommodate (i.e., condos), density increases because we have living spaces stacked on top of each other instead of everybody spreading out and owning a piece of land.

Surrounded by Green – You might be thinking, well in Toronto we have a lot of land to develop. But in reality, do we actually? Unfortunately, an abundance of build-able land is not the case. Toronto is actually landlocked, even though we are in the great country of Canada where there is supposedly plenty of land to go around.

In the map below that highlights the Ontario Greenbelt, Toronto is in the centre surrounded by all of the other metropolitan cities of the Golden Horseshoe. As you can see, the Greenbelt is highly restrictive and we are slowly running out of land because you cannot build on top of the protected Greenbelt lands.

The Golden Horseshoe is surrounded by the world’s largest Greenbelt and Lake Ontario. This is exactly why intensification in the city centres has been the priority of the government in the last few years.

The Greenbelt was first introduced in 2005 by the McGuinty government. The two maps below of the Golden Horseshoe are dated 12 years apart, 2005 vs 2017. The map on the left depicts the density in 2005. Meanwhile, the map on the right illustrates the density in 2017. It has only been 12 years since the Greenbelt was put into place but look at how much of the land within the Greenbelt has been developed in this short period of time. This then begs the question: At this rate, how much more build-able land will be left in the years to come?

Make Room, More People Coming! We are projected to increase our population almost 50% in the next 22 years to 9.4 million people from 6.6 million people, according to our own government. The graph below highlights this statistic.

The Affordability Factor – Over the last 12 years, average real estate prices have increased faster than the average income. So the hopes of saving faster than the price of real estate growth in the coming years could be like fighting an uphill battle unless you are doubling your income every few years.

I find it best to evaluate prices and trends from an affordability standpoint because for real estate, as much as there are speculators in the market, the majority of people living in these properties are local (regardless of whether they own or rent).

The following two charts are a great representation of Canada as a whole when it comes to affordability. In the first chart, you can see the Top 10 MOST AFFORDABLE cities in Canada with a price-to-income ratio as low as 4. This means that if you worked 4 years in that city, you could potentially pay off your house in full.


source: Zoocasa

In the next chart below, we can see the Top 10 LEAST AFFORDABLE cities. As illustrated below, Toronto ranks 3rd in Canada on this index, with average house prices at 19 times the median income!


source: Zoocasa

As of January 1st, the OFSI stress test has made it so that most lenders will allow you to buy a property approximately 5 to 6 times your gross income. This number used to be 7 to 8.

I’d also like to point out that the median income of $39,560 in Toronto, as outlined in the chart above, is the middle income class in this city, not average. Median income means that half of the population has less than the above-stated income while the other half has more.

With property prices for a single person at 19 times the median income, combined with only being able to afford a mortgage 6 times your income, you better be in the top 5% of income earners in Toronto to even dream of owning a property by yourself.

For 2+ people looking to buy a place together, at least there is a better chance at 8 times the median income (as per the above chart). However, the cruel fact is that half of the people in this category are no longer able to purchase the average home thanks to the OFSI mortgage changes mentioned above. This is exactly why the market for properties sub $800,000 is so hot right now. Perhaps this is the last chance for people to actually own a property!

MACRO Level Views – Now let’s zoom out of Canada and look at our city from a global perspective. The chart below uses a different metric for measuring income (average, not median). It ranks every city in the world based on average income-to-average prices. You can see that Vancouver stands at #30 for most unaffordable, globally speaking. Toronto just broke into the top 100’s recently at #99.


source: Numbeo

Although Toronto may not be affordable to half of the people in the city, Toronto is still very affordable relative to the other major metropolitan cities around the world. For anyone looking to immigrate to Toronto for a better lifestyle, our city is still very much attractive to the outsider looking in.

Circling back to that density chart that I was telling you about in the CMHC report, Toronto is still not considered to be very dense as it stands right now. However, the Golden Horseshoe is running out of build-able land. Toronto, being in the heart of this region, will be forced to intensify its density over the coming years. This will ultimately drive prices up.

Since the inception of the Greenbelt in 2005, the population has been growing and the prices have continued to increase but our supply, unfortunately, has not increased at the same levels. By taking a look at the chart below, you can see that the only feasible new homes being built have been multi-family homes (i.e., condos) as of late.

The Wrap – With the price of a single-family home (freehold detaches, semis and towns) significantly increasing and the lack of land to build on, we can only turn to multi-family homes (i.e., condos) to find affordable housing for everyone. This has been the reason for the recent surge in condo demand and pricing. With the current pace of growth, Toronto might eventually crack the list for Top 20 most unaffordable cities in the world.

The best time to buy was yesterday. The next best time to buy is today. There really is no better time to buy than now. If you’re sitting on the sidelines right now and just waiting it out, then you really need to ask yourself why. All of these indicators, stats and analyses done by researchers all point to worse times to come from an affordability standpoint. Buy a condo today if this is what you can afford now, because I can almost foresee that these won’t be getting any more affordable in the coming weeks, months and years.

Condo Buyers Rejoice! Opportunity Awaits!

Published on 29th March 2018

It’s been getting incredibly tough for end-consumers and more specifically, first-time home buyers to purchase their first property, let alone their desired property. As the entry-level properties climb in price, the affordability decreases. This week’s Insight Article has been inspired by some of my clients who brought the matters to my attention (thanks!). I will be sharing this insight with everyone here today.

If you have been looking in the resale condo segment of the market, especially in Downtown Toronto, you have probably encountered the countless number of bidding wars and unconditional offers that are almost, but not quite, reminiscent of the market in early 2017. It’s bananas out there!

Thanks to a few unintentional turn of events, everybody should consider looking into the assignment market as there are additional opportunities waiting for you in this very niche segment of the market.

Resale and Pre-construction in One – For anyone who doesn’t know, an assignment is like a resale property but because the seller doesn’t’ officially own the condo yet, as a buyer, you are buying the rights to close that condo in your name. Effectively, this would mean that you are buying it from the builder and being the first to take possession of the property when it is complete.

In an assignment sale, the Assignor, the original purchaser of the property, is looking to sell the rights to his or her purchasing contract. They would have bought the property 3-4 years ago.

Assignment Factors – Recently, there have been some major changes affecting the motivation of Assignors, as follows:
Prices have increased quite dramatically in the last 3-4 years for condos
Non-Resident Speculation Tax (Foreign Buyer Tax)
CRA Assignment Crackdown

Buy Low, Sell High – With the price increases that we’ve seen lately, the people who bought a condo 3-4 years ago are sitting on almost $100,000 in appreciation before having to make a single mortgage payment on their property. This is a ridiculous profit, but this also highlights exactly why we buy pre-construction for investment purposes.

Tax Avoidance – Some of the original buyers who are going to get dinged by the 15% tax as a result of the foreign buyer tax would rather sell on assignment instead of closing on the property.

I’ve done the math for a few of my clients in this category and for those who do not have the intention of moving to Canada, the numbers in most instances work in favour of selling via assignment versus selling a few years after closing.

Although there are workarounds to this tax, these “workarounds” do not work for everyone.

CRA Crackdown – The CRA has been cracking down REAL hard on the capital gains tax on assignments. Previously, investors would sell their property on assignment to avoid paying taxes on the capital gains of the condo. However, times have changed. The CRA is cracking down on this strategy and as a result, some of these investors are scared and have steered away from this strategy (as usual, people are scared of change and make bad decisions under pressure).

It’s a very simple audit for the CRA to conduct. They request all of the original purchasers from the Builder and identifies who actually closed on the condo. If Bob bought unit #1808 of Condo X but Joe closed on it, then evidently Bob sold the contract to Joe. That right there folks would be found tax revenue for the CRA. The CRA will collect every penny they can.

The Requirement – Most assignors will be seeking to have all of their profits paid upfront, but because you don’t own the unit until final closing, you cannot get a mortgage for this upfront cost. A sample calculation in the chart below on a $450,000 condo with an original purchase price of $350,000 works out to $170,000 in cash required to execute the deal. This cash requirement would be even more if the original deposit was an international deposit of 35%.

Having said that though, and through a lot of hard work, a client and I managed to get a deal done with less cash required than anticipated as we found a highly motivated seller.

The Wrap – This market segment containing a unique profile of highly motivated sellers looking to assign their property can be found if given the right tools and resources. So if you are looking to take possession of a condo in the next year and are interested in scoring a great assignment deal, definitely do give me a call at 416-436-9436 or email me at Zhen@PrimePropertiesTO.com. Let’s discuss how we can help you score a great assignment deal!

SOLD! Entertainment District Land Goes for $110,000,000!

Published on 22nd March 2018

Last week’s Insight Article talked about how the City of Toronto has effectively doubled their development charges overnight. In case you missed it, you can read about that here: Pre-Construction Condo Prices Are Primed to Increase!

As a follow-up to last week, I will be discussing yet another issue – the actual cost to build a condo is also primed for an increase this year. If you’ve been following my content for a while now, you know that when I recommend a project, there is quite some thought that goes into why I recommend it and a lot of the projects that you’ve seen me recommend have been in the Entertainment District in Toronto (area pictured below).

I’m a big advocate of the Entertainment District in Toronto because with the price per square foot to rent ratio, the returns that you could achieve is the most ideal for investors. Additionally, your tenant profile in this area tends to be the best of the best as well. As an added bonus, the growth in this area has been unmatched by any other area in the city.

Big Time Money! I have some good and bad news for you depending on your perspective. The last parcel of large land in the Entertainment District, a parking lot, has been bought by a developer for an astronomical price of $110,000,000. You read that right – ONE HUNDRED TEN MILLION DOLLARS. Queue: Doctor Evil’s pinky finger. Yes, that deserved all caps because that’s a whole lot of money!

That one expensive parcel of land is 229 Richmond St West, north of the fire station on Nelson Street between John St & Duncan St.

The Good and the Bad – This is good news if you’ve been investing in the Entertainment District for a while. The supply will surely be capped at this point until they start building on top of buildings, which is incredibly difficult to do and not very economical (but not impossible). Ultimately, this means that prices will go up due to the lack of supply.

This is bad news if you’ve been sitting on the sidelines still waiting to buy because when builders pay this kind of price for land, the charge per square foot is going to be very high in order for them to turn any sort of sufficient profit.

It always comes down to making money at the end of the day. The builders need to make money when taking on risk for developing the land. We make money as investors by taking on risk of buying projects before the construction even begins.

Land Acquisition Cost Comparatives – To give you some perspective on how crazy this deal is, I’m going to compare the last two projects and how much the land acquisition cost was. In January 2018, in the Entertainment District, 357 King St West & 8 Widmer St (Theatre District) were launched at an average price of $920 per square foot and $950 per square foot, respectively.

The chart above that I’ve put together for you to shows you the price of land, in total and the cost per square foot. The land acquisition cost for 229 Richmond St West is approximately 5 times the cost per square foot than Theatre District (8 Widmer St) just 3 years ago ($773.68 vs. $3,881.17). That’s insane!

But Wait, There’s More! Land acquisition cost is just the first part of the equation to build a condo. We also need to factor in the hard cost and the soft costs. The cost per square foot for these expenses are:

Hard costs: Approx. $350 per square foot
– All materials and labour.

Soft costs: Approx. $150 per square foot
– Everything else, development charges, architects, section 37, planning act, commissions, marketing, etc.

Land costs: Approx. $300 per square foot
– This is an approximate average price per square foot is based on Altus Group’s 2018 Real Estate Construction Cost Guide (CLICK HERE). This means that on a normal piece of land downtown, the cost per “build-able” square foot is close to $300.

When you add it all up, the cost is approximately $800 per square foot. This also does not factor in the risk of the condo becoming shorter due to city disapproval, which will mean less square footage (i.e., units) for the developer to sell.

The price per square foot that we paid at the initial offer for 357 King St West & Theatre District was an average of $935 per square foot (average between $920 and $950 from the chart above).

Let’s take a quick look at the math:

Selling Price: $935 PSF
Less Cost to Acquire Land and Build: $800 PSF
Total Developer Profit: $135 PSF

That’s about 14.4% profit margin. It’s still a lot of money, but it is quite slim compared to other businesses, especially given the significant amount of work that goes into the acquisition and development process.

With development charges doubling, construction costs continuing to increase, and this crazy land acquisition cost, even I’m preparing myself for the shock when the next few projects officially launch (especially 229 Richmond St West). I can’t imagine where it’s going to start – perhaps $1,200 per square foot?!

The Wrap – Despite the absurd purchase price for this piece of land, if all of the smart people at the developer’s office think they can make money on this project, then there is obviously something here. As they say, the juice is worth the squeeze. What do you think?

Pre-Construction Condo Prices Are Primed to Increase!

Published on 15th March 2018

I attended a real estate discussion panel last week with developers and city planners and it was an interesting discussion, to say the least. It almost felt as if all the panelists were on trial with the type of questions that they were being bombarded by.

Most of the attendees were asking about 1 of 3 things:

1. Prices increased too much, everything is unaffordable
2. NIMBY (Not In My Back Yard) protest
3. Foreign Investments

Maybe it was due to the background of the panelists, or maybe it was just an avenue for people to complain in the hopes that another outcome will occur if they voice their concerns, but I was definitely not feeling great about the energy in the room as it was largely, if not all, negative.

Although the headlines are screaming for a crash, the market is actually going quite strong and prices will likely continue to increase in the most affordable segments of the market, that is condos and townhomes but especially so in the pre-construction condo segment of the market.

Price Increase Again, But Why??! Pre-construction condo prices are going to see an increase soon but not because of the usual root cause (i.e., lack of supply). On the contrary, the increase is actually caused by the City of Toronto, believe it or not.

What most people don’t often talk about is the significant cost to develop such huge towers. Everybody thinks that the builders are charging more strictly due to demand. While there is truth to increasing prices when demand is high, there are also other reasons, such as increasing construction and development cost that result in increased prices.

Take the recent minimum wage increase as a prime example. I don’t know about you, but I’ve noticed that all my favourite restaurants have increased the prices on their menu. I remember back when I was a child, I could get a large bowl of pho (Vietnamese beef noodle soup) for around $5.00. This year, it officially surpassed the threshold of double digits ($10.00), as the cost to create this delicious bowl of noodle soup has increased. This same phenomenon is occurring in the pre-construction world as well and basically everything else. The most recent increase from the City of Toronto was the doubling of development charges, effective February 1st, 2018. Nobody talks about this in the headlines but it’ll trickle down to the end-user without a doubt.

Doubling the Charges – Take a look at the development charge cost increase yourself. You can see in the right-hand side, all the development charges have effectively doubled, if not more.

Capped Levies – As of right now, the standard capped levies that we get for our clients is around $8,500 to $10,000 for Bachelors and 1-bedroom units. For 2 bedroom units and up, it’s between $10,000 to $15,000. The developer would be responsible for the balance of that.

Effectively, with this new Toronto development bylaw, somebody will be paying for it. In other words, that’s us – the end consumers.

The Two-Way Play Wrap-Up – I can see this playing out in two ways:
The capped development fees will be higher in accordance to the increased amounts.
The price per square foot will go up.
Most developers who I have talked to are still working out the numbers to see how it affects the bottom line for them, so we will have to wait and see how this all plays out in reality.

All I know is, like my bowl of pho, we will be the ones paying for it as the end consumer. It’s unfortunate, but it is just the way it is unless someone can convince the City of Toronto to eliminate an additional $300 million dollars of annual generated revenue from these development charges.

Doom and Gloom is Here… Maybe?

Published on 8th March 2018

Brace yourselves my fellow investors and landlords, the media bombardment of the Toronto real estate market crash has begun!

As Expected – If you didn’t get a chance to read my insight post from late January about the expected doom and gloom headlines, you can click on the link below to have a read.

Brace Yourself, Doom and Gloom is Knocking

This week’s Insight Article is just to remind you that everything will be okay, no need to panic. Again, this was expected.

Some would say that I have a crystal ball (there’s some sarcasm there if you couldn’t tell), some would say that I got lucky (reality, perhaps), but I would say that I’m just a nerd and looked at the numbers and saw this coming.

Whenever you have a peak, especially a peak as high as the prices in early Q1 2017, the comparison is bound to look terrible on the descent.

PPTV – In this week’s episode of PPTV, I go over the stats that TREB just released in detail in order to explain why seeing these numbers is okay and why it doesn’t mean you should liquidate your portfolio right away.

You can watch it here: The World is Falling?! March 2018 Market Watch

“The overall average selling price for February sales was down 12.4% year-over-year to $767,818. However, putting aside the price spike reported in the first quarter of 2017, it is important to note that February’s average price remained 12 percent higher than the average reported for February 2016, which represents an annualized increase well above the rate of inflation for the past two years.”
– Toronto Real Estate Board President Tim Syrianos

I tend to agree with Tim’s thoughts on this one. If you look at the chart below, you can see that there was a giant spike in Jan 2017 and then a giant drop (relatively) back down. If you look at the trend, we can expect it to come down a tad bit more.

Spring Headlines Forecast: Gloomy – Unless you bought a detached house in the 905 at the absolute peak, you shouldn’t be expecting any crazy losses. If you’ve had your property prior to January 2016, you’re still rocking and rolling, so no need to worry. Do expect the headlines to continue talking about the doom and gloom for the next few months though.

If you have been following my content for some time now, you’ll understand how in this current market, there is no blanket statement about the entire real estate market as a whole. The trends and stats have been chopped up into segments and localized into each individual region.

Freeholds Lagging Behind – At first glance, the chart provided by TREB below looks terrible as everything is on the decline and negative. What nobody is writing about, yet again, is that the freehold houses (except for the towns in Toronto) are sitting on the market much longer or selling for less than the peak. However, the condo market is still seeing price increases despite the sales being down. As you can see below, the number of transactions is on the left (under the “Sales” heading) and average price is on the right (“Average Price”). The green highlights indicate increases, while orange highlights mean decreases.

Condo Market on FIRE – If you have been in the market as I have in the last few months, you’ll even notice that all downtown condos have offer dates on them, yet again! They are also selling with multiple offers, yet again! This is exactly why the prices are still increasing despite the overall average prices being down 12%. If anything, I would say that the condo market is preventing the total average prices of the market from looking even worse. That, in reality, is how strong the condo market is right now!

Affordability – At the end of the day, it all comes down to affordability as I’ve been preaching. The mortgage stress test did have an effect on the market. The lending rules implemented by OFSI have made getting any kind of mortgage much more difficult, especially a mortgage over 1 million dollars.

Gone are the days where you can borrow up to 7 to 8 times your gross income. You can borrow approximately 5 times your gross income now. On a $100K family income, that’s a difference of $300K, from being able to afford $800K to now only $500K. This is why the properties going for over $1 Million have a hard time on the market right now because the credit isn’t available for such purchases. It is exactly why the most affordable segment of the market, condos, is super hot. It all comes down to affordability, folks!

The Wrap – So don’t let the coming months of doom and gloom freak you out. As long as you’re not investing strictly for the appreciation, then you’ll still do great!

The Untold Truth About Pre-construction Platinum Agents

Published on 1st March 2018

As much as I enjoy living and breathing real estate, there are a few things that I actually dislike about it as well. However, I am a glass half full kind of guy.

When I started out my real estate career (a story for another day), truth be told, I disliked realtors and disliked being one because of the stigma that came with it – i.e., realtors are oftentimes seen like sleazy used car salesmen. Don’t get me wrong though, there are a ton of amazing realtors out there that I know of and have had the pleasure of working with. On the other hand, a lot of the bad apples in our industry conduct business in ways that’s, let’s just say, are “interesting”.

Got “Platinum Access”? Think Again – This is especially true in the pre-construction segment of the market as it is highly competitive to get allocations to condo projects. Having worked with many clients who have been burned recently by bad realtors, I thought that this would be an opportune time to shed some light on how “platinum access” with agents really work.

The term platinum gets thrown around so often that I personally don’t think it has any merit anymore, not to mention, there is no way to prove that an agent is actually a platinum agent. So in essence, anyone can claim to be one.

Buyer Beware – The other interesting component is that even though an agent may have platinum access to one project, it doesn’t automatically mean that they have this same type of access to all of the projects. So what does that mean? Agents have the full discretion to designate themselves as a “platinum agent”.
So if someone tells you that they are a platinum agent for ALL projects, I would run the other way. Even the most successful agents that I know don’t have platinum access to everything.

This is not to bash on platinum agents because legitimate ones can actually get you access before everyone else, thereby saving you lots of money if there are any incentives. However, there does need to be more clarity on what and who is actually a platinum agent.

Pulling Back the Curtains – Since there are no clear definitions of what a platinum agent is, I’m going to pull back the curtain on how the allocation process (the dispersion of units) typically works. I used the word typically here because every developer operates differently.

I’ve personally coined the terms for each of the categories below as there are no correct terms that are consistent across the board for the level of advance access myself or other agents may have.

1) The Partner Hook-Up – In most cases, if the development is a joint venture deal, the partners of the developer will have their pick of units to buy personally before everybody else.

Access: Partners only, no realtors
Total Percentage Sold: 1 – 2%

2) The Family and Friends Connection – This is loosely used by different developers but it is basically a private sales event for family and friends only. This is becoming more rare as demand for pre-construction condos is rapidly increasing.

Access: Only relatives and close friends, no realtors
Total Percentage Sold: 3-4%

3) The Secret Agent Sales (aka. Pre-Platinum or VVIP) – This is when the developer secretly starts selling way in advance of the project being officially launched, for reasons that I will not get into in this post. If you have ever bought a pre-construction condo with us and have had to see the floor plans in person without any of the finalized marketing material available, then you’ve been part of this category. This doesn’t happen all the time. If you come across these opportunities, take it!

Access: A couple of agents
Total Percentage Sold: 5-10%

4) Platinum Access – This is when a select few agents who have a proven track record with the developer are given access to sell to their clients. It will either be by worksheet (reservation forms) or allocations (pre-determined units). For high demand buildings, the project is often sold out at this stage.

Access: Real Platinum Agents identified by the developer
Total Percentage Sold: 11 – 100%

5) VIP Access – Truth be told, VIP access is even more loosely thrown around than “Platinum Access” because anyone can be a “VIP Agent”. It’s sometimes as simple as clicking a button to register with the developer.

Access: Almost all realtors
Total Percentage Sold: Units left over from the previous phase

6) Public Access – This is when the general public will get access to the project, where anyone can walk into the sales centre and buy a unit. There are a few low-rise developments outside of the GTA where the developer will launch their project directly with this category of access.

Access: All Realtors & General Public
Total Percentage sold: Units left over from the previous phase

7) Developer Hold Back – After the project has been “sold out”, the developer may release additional units to agents or the public. These are units that the developer has opted to hold back initially and not sell in the earlier phases. More often than not, these hold back units are more expensive than when they were first launched. However, there have been a few times when my clients scored a deal during this phase (i.e., Daniel’s Waterfront & Minto West Side last year).

Pricing and Demand – It is important to note that at each stage, the prices may or may not change; it will ultimately depend on the project and the demand. Yes, sometimes prices increase, but sometimes they don’t and certain incentives are either removed or added based on the demand.

The ultimate goal for the developer is to sell out the project in order to achieve maximum profits. If the demand is huge, they will increase the price. If the demand isn’t quite there, they will add incentives.

The Wrap – As you could imagine, everything from prices to availability and incentives can change at each phase. However, what remains certain is that the good units are always picked up first and as time passes, your selection diminishes. So if there’s a great opportunity that you see, don’t wait. Act fast before you regret it!

 

Until Next Time, Happy Real Estate-ing,
Zhen

Would You Sing to Rent a Condo?

Published on 22nd February 2018

There are times when the Real Estate Market presents itself with a hilarious series of events that make the long hours of the profession really worth it at the end of the day.

Recently, there has been a slew of heated articles about the rental market being crazy for tenants right now. These articles have been about things like multiple offers (yes, it’s been happening for a while) to rapid price increases (yes, it has also been happening for a while) to tenants being priced out of the Downtown Toronto market (yes, this has been happening too but more on that next week).

Trending Now – I’m no professional copywriter by any means nor did I study journalism, but the basis for these heated articles seem to be one of the four below:

1) Quote from a tenant in a bad situation;
2) Outline of how dire their situation is;
3) How it’s unfair Torontonians can’t rightfully live in their own city;
4) Blame something or somebody.

The most recent one is by FAR the best, not because it’s actually positive unlike most articles, but because it’s creative and funny!

Recently, a prospective tenant, Huy Do, couldn’t find an apartment to rent and/or was being rejected by so many landlords (reasons that are obvious, but I won’t list here) that he ended up writing a parody song to Chainsmokers’ Closer. To his valiant efforts, he managed to secure a condo to rent. I do have to credit his songwriting capabilities as it’s quite good. I’ll put a link to his song at the end of this insight article to add some humour to your day.

So that poses some hilarious questions…

Would you write a song, sing it and post it online just to find a place to live?

Have we gotten to a point where that’s what it takes now to put a roof over our head?

I honestly (and hopefully) don’t think so, but the ingenuity is quite amazing.

So you must be wondering, how bad is the rental market right now?

I’ll answer it here in two short sentences below, but also provide you with a real-life case study as well.

  • If you’re an investor the current rental market is completely in your favour, especially if you have a pre-construction condo coming soon.
  • If you’re a tenant looking for a condo to rent, you’re going up against a lack of supply, a huge demand, and a huge price spike. Good luck.

Now let’s take a closer look at the case study. I’ve been representing the Entertainment District for a while now since it has been one of the best areas to invest in over the last 2 years and it continues to demonstrate that. So I took the 1-bedroom rental stats from the area in the first 3 weeks of February 2018 to give you an idea of how the rental market shaped up.

One thing to keep in mind is that February is a VERY slow month for rentals, with most rentals turning over during the spring and summer months.

Below are the parameters of the Entertainment District.

Here are the details for the 38 properties that were leased in February 2018.

Now, here are some shocking statistics from the above details:

  • 30 of the 38 properties, or 79%, went for 100% of the asking price or more. One can assume that most of those had multiple offers.
  • Average Lease Price was $2,160.63 (That’s nuts, but I expect it will increase some more in Spring 2018)
  • 12 of the 38 properties, or 32%, were leased within a week.
  • Green Highlight represents over asking and yellow represent less than 100%

So it’s safe to say that the rental market is pretty crazy right now. If you prefer to NOT have to write a song, sing and post it, then here are some alternative strategies that you may like better. These are some strategies that I’ve seen prospective tenants use to secure a rental.

1) Increase deposit (up to 6 months instead of just first and last)
2) Overbid (as seen from the stats above)
3) Accept earlier possession dates

Tenant Profile – Here is something even crazier for you to ponder. I’m going to work back the numbers for you so that you understand who these prospective tenants are.

  • If the average rent is $2,160.63, that means the rent you pay each year is approximately $26,000.
  • Now let’s assume that half of this individual’s income goes towards their rent, while the other half goes towards other living expenses and savings. This would mean that this individual would need approximately $52,000 after-tax income ($26,000 x 2).
  • What does that translate to in gross income? $70,000.

This means that if you own a condo in Downtown Toronto right now, then you are picking between tenants who make $70,000 or more. That’s insane! That’s MUCH higher than the average income, not to mention most of them have nearly perfect credit scores.

The Wrap – To the ladies and gents who are prospective tenants reading this Insight Article – that is your competition, my friends. If you have the funds saved up, perhaps it’s time for Plan B and consider buying your own condo before that gets out of reach too. If you’re a condo investor, CONGRATS to you for making the decision to invest – time to reap the rewards!

Link to Huy Do’s Parody Song: https://soundcloud.com/thelittlestband/closer-to-a-one-bedroom

Until Next Time, Happy Real Estate-ing,
Zhen

10 Shocking Condo Stats That Will Blow Your Mind!

Published on 15th February 2018

Early February is usually when all of the big data miners come up with their year-end review of the previous year’s market since all of the stats are available and reported, including TREB (Toronto Real Estate Board). So we’re going to break down some major numbers in the Condo market today.

“Numbers don’t lie” – I don’t know how much you believe in this old adage, but I would prescribe this slightly modified version of it instead: “Numbers don’t lie, but it’s up to the eyes of the beholder to interpret them the way they want”.

So what I’m going to do in this week’s insight article is provide you with some stats and my initial thoughts on the stats. How you personally want to interpret it will be completely up to you.

All of these stats come from Urbanation. They are the industry’s most trusted source for condo data as they actually include sales of pre-construction condos which TREB cannot track. Urbanation also consults for many major developers in the city so you know their data is relied upon quite heavily in the GTA condo market.

Without further adieu, let’s begin.

1) 32,000 pre-construction condos were sold in 2017, which is up approximately 20% from 27,000 in 2016.

Okay, this was jaw-dropping. The number of unit sales was supposedly down approximately 9.6% in the resale market according to TREB, but were up 20% in the pre-construction – umm… WOW! I knew the demand was significant but a 30% swing in these resale versus pre-construction numbers – that’s HUGE!

2) 35,000 pre-construction units were available for sale in 2017, and 32,000 of that was absorbed.

That’s also nuts – that’s an absorption rate of approximately 90%, meaning that for every 10 new-build condos on the market, 9 out of 10 are bought. More condo units were sold in the pre-construction market than the resale market!

3) Pre-construction condo prices saw a 20% increase in price from January to the end of December 2017.

I’m not surprised here. At the start of the 2017, I was still seeing Downtown Toronto condos at $900 per square foot. It’s well over $1,000 per square foot now. Congrats to everybody who picked up a unit in 2017!

4) 500 unit complexes are being approved at a higher rate now such as Icona, Transit City, Time & Space, and M City.

Years ago, we would never get these super projects with over 500 units. Present day, master-planned condo communities have become the norm. With some of these projects having over 2,000 units, this tells me that the demand for pre-construction is huge and has so much more room for growth. One of the super projects mentioned above sold out in only 2 days!

5) 38% of the pre-construction market is now in the 905 area code.

This didn’t surprise me as it’s getting increasingly tough to afford a downtown condo at +$1,000 per square foot. As a result, investors and first-time home buyers are seeking their next property in the 905. Don’t sleep on Downtown Mississauga, Downtown Vaughan and Downtown Markham.

6) Although the projected number of occupied units was 20,000, only 13,000 units were occupied in 2017 as 7,000 units simply didn’t finish on time.

This is an interesting statistic. Apparently, each year around 7,000 units that were projected to be occupied don’t make it due to construction delays from material and weather. 13,000 units occupied out of 20,000 definitely leads us to a huge supply problem. Supply is just not keeping up with the demands, which results in pretty big price jumps in the rental and resale markets.

7) Only 2% of the occupied units get listed on the resale market, which is down from 7%.

This means that approximately 98% of the supply goes into the rental market and the rental market is still crazy right now. I’ll say it again here – there is a HUGE supply issue in the condo market. This explains why rents are constantly increasing and properties being rented out in only 1-2 days with bidding wars.

8) We’re expecting 22,000 units to occupy in 2018.

So 22,000 units to occupy less the usual delay of 7,000 units and we’re at 15,000 units to occupy in 2018. With approximately 130,000 (potentially more thanks to Trudeau) people immigrating to the city, that’s hardly enough supply this year.

9) Projects on average are taking 12 more months to complete than 10 years ago.

Not surprised with this as the projects are getting bigger now and the Ontario Municipal Board (OMB) is more stringent on approvals.

10) Tenants are staying on average 6 months more.

Also not surprised here. There has been a decrease in the lateral movement from years ago due to rent control and tougher lender situations. This explains the extremely tight 1% vacancy rate in Toronto.

Final Thoughts – So that wraps up the 10 surprising condo statistics that will blow your mind. Hope your mind was blown, as mine was! With the city growing as fast as it is (130,000+ people per year), we simply aren’t building fast enough to keep up with this type of demand and population growth. Even with the projected number of completed units expected to increase over the next 5 years, by my math, that’s still not enough to slow the demand.

There will be a breaking point in the Downtown core when it becomes even more unaffordable. Perhaps this breaking point will be when the market reaches $1,400 per square foot (translation: $700K for a 500 square feet 1-bedroom condo). High rise intensification is the name of the game according to the OMB’s new rules so I wouldn’t be surprised in the next 10 years when we run out of build-able condo space in the Downtown core.

Until Next Time, Happy Real Estate-ing
Zhen