Why purchase pre-construction condos at inflated price?

[CN Tower]

I wouldn't be so worried about the high average prices. It's the volume of new sales in the Five-Hundo per square foot range that is frightening. These aren't real buyers. They are momentum traders who blow through town like a tornado.

Calgary & Western Canada is up so much because of the resource boom. DUH!

 

[Eug]

I wouldn't be so worried about the high average prices. It's the volume of new sales in the Five-Hundo per square foot range that is frightening. These aren't real buyers. They are momentum traders who blow through town like a tornado.

Calgary & Western Canada is up so much because of the resource boom. DUH!

Western Canada has its fair share of real estate investors. In fact, I wouldn't be surprised if it's more rampant in Calgary than it is in Toronto, although that's a complete guess on my part.

 

[daveto]

I should point out your own link says Canada overall has increased by 15% more than Toronto (ie. 38% vs 33%), and that's because there are other cities that are much more out of whack than Toronto.

EUG, I completely agree. I'll go further, and say that the 38% is lowered by the inclusion of the Toronto 33% figure, and thus the non-Toronto figure is prob 40%.

What I'm trying to do, is to get the "Toronto is different" crowd to either concede that Toronto is not different, or that the rest of Canada is in a bubble. There are a whole bunch of people on discussion boards like this in Vancouver and Calgary who offer the same reasons as the "Toronto is different" crowd to refute any suggestion that their own market's prices are inflated.

Once one accepts that other house prices cities in Canada are likely inflated, one is more able to recognise it locally. Further, even if Toronto isn't inflated (or only 10%), then what happens to our national economy when instead of seeing 5% annual increases (above inflation), we see 5% decreases (nat'l avg) for 2 or 3 years?

Teranet vs MLS
Teranet vs MLS track different cohorts. Teranet tracks paired resales of the same property, and gives a sense of the true increase in price for the same unit. MLS tracks all sales during a period. One of the problems with both measures, is they don't reflect the changes in the sizes of the units being sold. I think we can all generally agree that there are far more condos being sold, and that the sizes of the condos (and many new homes) are smaller now than 20+year ago?

Figures 1998-2009
The following link from CREA (click on "avg price", 4th chart down) shows nationwide price increases from $125k to $300k 1998 to 2009. 166% increase.
http://creastats.crea.ca/natl/mls_stats.htm

The following link from TREB (7th chart down) shows Toronto price increase from $210k to $420k 1998 to 2009 (100%)
http://www.torontorealestateboard.com/consumer_info/housing_charts/index.htm

I don't think its an entirely fair comparison, because Toronto had such a huge increase in the late 1980s, and the subsequent drop still left prices higher than at the beginning of the runup.

Consider the following chart, which shows that "trough to trough" Toronto prices 1986-1998 still showed a 50% real (and 20% nominal increase), whereas the prices of many of the other major cites were more flat during that period.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

Conclusion
My point was simply to encourage the "Toronto is different" crowd towards considering the presence of inflated prices within our national borders. Once they recognise that possibility (likelihood?), then I think they are one step closer to joining me on the dark side

 

[Eug]

Well, I think it's pretty common sentiment (albeit not held by all) that Toronto is slightly inflated, and some other large cities are more inflated.

The questions that arise are:

1) How much are they inflated?
2) How much price inflation makes a bubble?

To say Toronto is 5-10% inflated might actually jive with Teranet's numbers.

You bring up a valid point that price inflation may have been more pronounced in the condo group in some areas, but then again, that's not really a huge surprise. Condos have two things going for them: 1) They're the easiest purchase for first time buyers and 2) City living is becoming more and more popular. So at least a little bit of that faster appreciation might have been justified, but I agree 5% yearly appreciation is probably unsustainable, esp. in times when the inflation rate is < 2%.

 

[X2 Buyer]

This sounds exactly like what happened in Miami around 2005 except you can substitute South Americans with Chinese. They had big pre-sales there too trust me, and the city was growing fast. I met plenty of cab drivers who bought units during the boom. If you think the price of condos in Shanghai has any relevance to the price of condos in Toronto you don't understand how real estate works and you will probably lose all your money. When the unit finally gets into the hands of the guy who wants to live there and he can't afford the maintenance fees let alone the mortgage payment all hell will break loose.

This is not a classic pyramid scheme real estate bubble but a far more portentous one. If these foreign investors get spooked or decide to take their game ball and find a better playground the market will implode and the locals will be left to pick up the mess.

I am not saying Toronto's market should be as like any of Shanghai's. However I know people really consider Shanghai's market is in a bubble and they sold condos over there and bringing in the money to invest. Such as a friend's agent every single time she has at least five pre-construction condos on hand, different locations across GTA and different year of closing to minimize the risk. Meanwhile she is selling them to interested clients.

While I do not know what other countries' people perception to Toronto / Canada's real estate market, since Canada is open to immigrant friendly, a lot Chinese are investing here especially there is probably a true bubble in Shanghai / Beijing these days. It is a trend on the flow of the world hot money. That is all and probably it partially explains the appreciation on the Canadian housing the past several years.

 

[cdr108]

Good findings.

From this price list Toronto is at US$4007/sq. m so it is around $370/sq. ft. therefore I assume this is the average price for GTA not downtown Toronto. So here is why all other foreign investors will come to buy downtown Condo here.

Shanghai (city wide equivalent to GTA here) is at US$2918/sq. m around $270/sq. ft.

Downtown Toronto highest price is around $800/sq. ft such as Bloor one;
Downtown Shanghai highest price is around $3100/sq. ft (200K RMB per sq. mhttp://www.021fang.com/sub_paper/22977.htm - if you understand Chinese).

Btw, the income level is 15.5:91.6 for Shanghai:Toronto if the New York City is at 100

Shanhai's definitely in a bubble ...

http://www.shanghaidaily.com/article/?id=424729&type=Business

Shanghai's new home sales soar

By Cao Qian | 2010-1-5 | NEWSPAPER EDITION


NEW home sales more than doubled in Shanghai last year, boosted by robust demand from end-users and investors.

Sales of new homes, excluding those meant for relocated residents under urban redevelopment plans, totaled 17.64 million square meters in 2009, a rise of 101 percent from 2008, Shanghai Uwin Real Estate Information Services Co said yesterday.

A total of 13.94 million square meters of new houses were launched in the city during 2009, an annual increase of 9.8 percent.

The average price of new homes jumped 16 percent year on year to 16,188 yuan (US$2,370) per square meter as a result of ample liquidity and an inadequate supply.

In December, new home sales fell 14 percent month on month to 1.44 million square meters while home prices rose 8 percent from November to an average 20,187 yuan per square meter. On an annual basis, the price soared 65 percent from December 2008, according to Uwin statistics.

"The significant rebound of new home sales in the first half of 2009 was caused by a release of pent-up demand from end-users, which was mainly triggered by developers cutting prices," said Lu Qilin, a researcher at Shanghai Uwin. "Increasing demand from investors at home and abroad, particularly for luxury homes, began to soar in the second half and that helped push up the average price notably."

Separately, Guangzhou-based Poly Real Estate replaced China Vanke as the top developer in the city by selling the most new homes by value at 10.9 billion yuan for the whole last year.

 

[X2 Buyer]

Shanhai's definitely in a bubble ...

http://www.shanghaidaily.com/article/?id=424729&type=Business

Thanks cdr108 for the research - exactly the smarter investors already sold theirs in Shanghai. See my above reply. I am still interested to see how the market goes next year in Shanghai..will keep everyone posted.

 

[Eug]

Aside:

One thing I found interesting about the Chinese real estate investor market was some of the higher end western-style units were sitting empty. It was not that they couldn't rent them, but it was because they didn't want to rent them. Apparently, in certain classes of homes, once it has been "used" it drops in value, like a car. So investors are actually buying up units and leaving them empty intentionally. This means that these new builds aren't actually even being added to the real housing stock. They're just in investor limbo.

IMO, this magnifies the potential bubble-ness of Shanghai's market. Fortunately for Shanghai's market this is not the norm.

 

[X2 Buyer]

Rental income in Shanghai really means a fraction of the return. Not like a healthy market that you can break-even with rental income there. Though people still keep buying instead of renting and ignoring the bubble fact.

 

[pilinha]

I was looking for a pre-construction building 2 month's back and was shocked by prices.

You're much better off taking your down payment and flipping resale homes in the time it takes the condo to be built.

I put a $50k downpayment on my unit and I didn't move in for almost 4 years. Yes, I bought on opening weekend. While I can make a profit today selling my unit, I could have made much more money investing that money for other thigns.

So my advice today: buy resale.

 

[Monaco]

I was looking for a pre-construction building 2 month's back and was shocked by prices.

You're much better off taking your down payment and flipping resale homes in the time it takes the condo to be built.

I put a $50k downpayment on my unit and I didn't move in for almost 4 years. Yes, I bought on opening weekend. While I can make a profit today selling my unit, I could have made much more money investing that money for other thigns.

So my advice today: buy resale.

When I was looking at assignments this spring, the profits people were asking for were excellent (and didn't require a lot of work like flipping resale).

Of course it depends on many factors like location, timing, deposit structure. But these are excellent returns for 4 years. As an example:
Deposit $35-50k with Asking Profit $100k at assignment. So an investment of 35-50k gave these sellers a profit of 100k after 4 years.

 

[steve_toronto]

future price increase?

When you purchase a pre-construction condo, you are investing in a condo apartment "future". You put down a deposit for the right to purchase this unit at registration, in most cases that current value of your unit is higher than the agreed upon sales price.

People were saying the same thing about Maple Leaf Square, that $450 psf was outrageous, compared to resales of $350 to $375 psf Downtown in early 2006. Now $450 psf looks pretty good compared to the $650 psf at ICE - Phase 2, but still good compared to resales at 18 Yonge, Infinity, Pinnacle Centre at $470 to $500 psf.

Yes, I agree that the purchase of most pre-construction projects during last 5-7 years is a good investment. What if the "future value" of the pre-construction condos will not be appreciated at our "anticipating pace"?

Consider the 2C+D of the 300 Front Street (F) and #217 -- 20 Blue Jays Way again (B) again. The F with 988 sqft at $646,500 is priced at $654/sqft and
the B with 1115 sqft at $529,900 is priced at $475/sqft, and in the 2015 resale market, both condos are comparable. Assuming 5% annual appreciation (which is by no means guaranteed), the F shall be priced at $757 ($654 with three year appreciation) and the B at $606 ($475 with five year appreciation).
It seems that the F still at 25% premium. The price of F and B will be comparable at 2015 only if the annual appreciation is at least 10% for the next five years.

For the purchasers of the 300 Front Street projects, do you really believe that the average condo price of Toronto downtown core will be appreciated at 10% average for the next five years?