Are we finally hitting a breaking point in the pre-con market? I am getting so tired of going to pre-construction condo launches for relatively standard buildings (even though they all claim to be luxury these days) launching at insane prices. There is no way your $700,000 small 1 bedroom condo with a terrible layout that is a 20 minute walk to the closest subway is going to come anywhere close to breaking even with 20% down unless rents skyrocket drastically, which I don’t see happening. Breaking even means that 650sqft condo is going to need to fetch nearly $5/sqft in 4-5 years to just break even. That means you will need a rent of roughly $3250 just to carry the condo with 20% down. Sure, you could probably make it work at those numbers if you are AirBnBing the place out at $150-$200/night, providing that your guests don’t start tossing chairs over the balcony drawing attention to your illegal operation, but that is not realistic. The numbers just don’t even make sense anymore and even stupid investors are saying enough is enough, except for perhaps some dumb money (people thinking the crazy run we have had in the market the last few years was normal and is going to repeat itself).
This morning I attended the Toronto Condo Network’s (a group of Toronto Realtors who meet once a month to discuss topics related to the condo market) monthly event where Urbanation was a guest speaker. For those who don’t know, Urbanation is the consulting firm who developers turn to when they need advice relating to launching a new development. They track the most information and publish regular reports which tell one of the best stories of what is going on in Toronto’s condo market. As usual they delivered with an amazing presentation, but there were a few slides that really stood out for me as quite alarming.
Side Note: Keep in mind the following numbers are based on the Greater Toronto Area, not Toronto specifically. These numbers may vary from area to area and it is best to always look at the intricacies of a specific market when comparing real estate as an investment.
Detached Looking VERY Attractive
This slide came no surprise to me, as I think the time to make the move from condo to house has never been better. This exact gap is actually what I blame for a big decline in sales over the last few years as it doesn’t make sense to sell your 2500 sqft home in exchange for a 1200 sqft condo when you compare pricing. The homeowners are holding put watching the condo market keep soaring waiting for their turn for prices to climb again, and I think it is coming soon. If you are in a large condo right now, you might find the gap to buying that dream home isn’t all that much anymore and it might be something to strongly consider.
Lots of Condos Under Construction
We are at record highs for active construction and we gotta pray the number of people coming here matches these figures. Roughly 100,000 people move to the GTA every year, and that number is climbing and expecting to climb higher over the next few years, but we gotta hope these people have lots of money, a decent job lined up and don’t consider cheaper areas.
Gap Between Resale & Pre-Con Prices Widening
At what point do people start looking at the resale side for value to buy a property as an investment or start to renovate older condos at a profit? I think there is great value in some older buildings on resale right now as they offer excellent square footage for a fraction of the price of new construction. The majority of pre-construction right now is overpriced in my opinion.
Builders Cancelling Projects
2018 was a BAD year for pre-construction cancellations. Sure, it was led predominately by The Gupta Group’s Icona Development and Liberty Development’s Cosmos projects, but as a potential purchaser of pre-construction this is always one of the risks you must consider and we are currently trending in the wrong direction.
Required Break Even Rents Are Scary
The rents required for places to break even are out of whack. According to Urbanation the average new construction condo being sold today is going to need rents to increase by 52% in order to break even with 20% down assuming a 4% interest rate. I mean sure the rental market is growing, but I would not bet on those kind of returns.
Assignments Looking Really Good Right Now
Why would you pay the premium of buying something new, when you can pick up a condo almost ready on assignment right now. I suspect we will see a huge increase in number of assignments over the next couple of years where people either can no longer close on their pre-construction investments due to the stress test or because some will look for that quick guaranteed buck. I myself bought a pre-construction condo back in 2014 and if I were to sell it today I could nearly double my money. It can be very tempting at times.
Competing With The Developer On Rentals
One last interesting point that the representative from Urbanation brought up is that more and more developers are holding back a large number of units on many projects and putting them into the rental pool themselves. This means that you will be competing with the developer when it comes time to rent your place, and considering most investors are just buying 1 or 2 units, if the prices get pushed down it will be much easier for the developer to take the hit than the individual investor.
If you still want to invest in pre-construction after reading all this, just do your research. Personally, if it was my money I think the areas with the best value in the market right now are resale older condos, some assignments and the freehold market. Now more than ever is it important to stick with established developers with a good track record that aren’t going to screw you over a few years down the road. There are still gems to be found out there, BUT you have to look EXTRA HARD and run a lot more numbers than usual. If you need help assessing a pre-construction investment, just send me a message, but I can tell you right now 9 times out of 10 I can probably find you something that makes way more financial sense either as an assignment or on the resale side.