CONDO MARKET REPORT
The new year started the way that 2015 ended: with strong sales and price growth. That is what we called for in our 2016 Forecast. There seems no reason to change unless one foresees some significant shocks to the Toronto economy and we don’t. We realize that our Commentary may be of the ‘same old…same old’ stuff but we are more interested in being right than in being boring.
In January, Toronto Real Estate Board sales were ahead by 8% over January of last year (and we will admit that weather had some impact). TREB’s own Home Price Index (not average price) was ahead by 11% from January of last year. Breaking these price increases down by area and property type produced a range of increases from a high of 16% for detached housing to a low of less than 5% for condos in Toronto itself!
In the downtown condo market, January over January sales were up 17%. But new listings for January were the same as a year ago and active listings are only 4% higher. In the Humber Bay condo market both sales and new listings were the same as January of 2015.
In terms of the pre-construction or the new condo market, you have to go back to 2011 for the record sales year with almost 26,000 sales. In 2015, there were just 20,000 sales. At the same time, 20,000 new units were completed and entered the market. Going forward we expect 2016 pre-construction sales to be in the area of 21,000 units, which supports our position that the condo market will remain balanced and that investors can expect price increases to average 3-4% per year. Interestingly, Government of Canada 10 year bonds are now selling at a 1% yield. Does anyone think that condos will not go up by more than 1% over the next ten years? It’s not surprising that more and more investors, not just foreigners, are looking at the real estate market. All you have to do is look at prices in some of the biggest cities in the world and Toronto still seems fairly cheap
SOHO CONDO HOTEL: 36 Blue Jays Way
In this Report, we looked at condo hotel units. Most investors fail to distinguish between residential condo units that also include a hotel component as part of the building versus condo hotel units which are part of a hotel rental pool and where owners get to live there for only a few weeks a year. As such they are treated as commercial properties. We are not a big fan of condo hotel units as we think there is high risk and minimal returns. On the other hand residential condo units associated with a hotel (where owners live year round) have gotten a bad rap from lenders and hence buyers. Lenders require bigger down payments, usually in excess of 20% and they also charge slightly higher rates because of the hotel component risk.
To prove our point, we selected the Soho Condo Hotel at 36 Blue Jays Way. First registered in 2005, we tracked a one bedroom having 620 sq ft without parking or locker. It sold in 2005 for $180,000; in 2008 for $246,000; and in 2016 for $310,000. That final price is just $500/sf which for its location is at the low end of condo prices. But over the 11 year period it appreciated at 5% per year which is consistent with the overall market. One of the major reasons is that condo fees there rose by just 2.3% per year during the same period. The two bedroom unit we looked at also sold first in 2005. The initial price was $365,000. It is a two storey, with two baths and parking at 911 sf. The same unit sold in 2009 for $380,000 (after the minor market correction) and again at the end of 2015 for $450,000. The final sale price is also at $500/sf. However this unit only appreciated at 2.2% over the period which is less than most condo units downtown. The only explanation for this under performance is that lenders are uninformed and have discouraged buyers and their agents. The building consists of 203 units and there are currently only 4 units for sale, all in the $500/sf range.
We are still in the slowest part of the year for the rental market. However, there were over 800 units leased downtown in January compared to just over 300 sale units. Rents remain steady. Studios are leasing from $1400-1450 per month. The entry level one bedroom without parking is just over $1600 per month. This is the most popular unit type rented at just over 25% of the total rental market. The most expensive one bedroom plus den with parking unit is averaging over $1900 per month. The two bedroom market starts at just under $2200 per month and reaches almost $3000 per month on average for a two bedroom plus den and parking. Renters should note that parking is a feature in the two bedroom market and no parking is way more prevalent in the one bedroom market. While most people think that the rental market is slower at this time of year, the average time on market for rentals is less than 20 days. The vacancy rate remains under 2%.