Our recent market has rewarded almost all participation turning even weak choices into successes. Simply said if you bought anything you have done well. The market for the next decade, however, will reward selection and will require greater discipline. Short term purchases (held less than 5 years) will rarely be as successful as they have been this past decade and we will see flat or negative returns on purchase of properties that were not well thought out.
I believe that there is going to be a separation of price appreciation between condos (Toronto still has an ability to continually supply any increase in market demand) and houses where the supply has been fixed. It is important to understand what you are really buying with real estate and who will want to pay for it when you are ready to sell.
The typical $700,000 to $900,000 house in downtown Toronto today sits on a lot that is worth $500,000+, and that is what you are investing in. I do believe the value of this land will continue to increase in the next decade. Even the most pessimistic forecasts I have seen do not expect 3+ bedroom homes in Toronto to be cheaper 10 years from now.
Condos are more of a consumptive purchase where you are buying convenience and location and with a budget less than $500,000(the price of a lot) you really don’t have much choice now or in the future as land prices downtown will continue to rise. Quality buildings that are well managed in great locations will always be popular but that is a small subset of this market. Decks, parking, views and reasonable maintenance fees will all become more important as ways of justifying pricing but the growth in prices will be slow (flat to negative after inflation) and the rent vs. buy calculation becomes more important for potential short term buyers. Condos built 10 years ago are already showing their age and ones built 20+ years ago are very hard to sell.
I would like to share some specifics with you now. Many of the articles I have read recently seem to focus on one aspect of a real estate transaction (Sold for $100,000 over asking) or lump all transactions into one statistic (Toronto home prices up 4%) but don’t really tell us what is going on. I thought it would be helpful to analyze two recent sales of a nice home and a condo in a good downtown Toronto neighbourhood and see what we can make of them. If you would like to see the listings with pictures of these examples please send me an email.
On Feb 28 a 3+ bedroom semi detached home sold in a desirable neighbourhood downtown.
It was listed for $819,000 and it sold for $931,000 with 9 competing offers in a week.
The home had 1960 sq ft on the upper 3 floors with an above average home inspection and a 780 sq ft basement (potential for income suite) and backyard with parking for 2 cars.
For comparative purposes we will use a calculation that values properties in $/sq ft. (value/total sq ft)
So this home sold for ($931,000/1960)=$475/sq ft (calculation is done with above ground sq ft only)
The new owners could list and sell that lot for $550,000 very quickly if the house was demolished.
Therefore ($550,000/1960)=$280/sq ft of that $475/sq ft was land value.
Another way of saying this is that the land or lot represented 59% of the purchase price.
So the buyers paid $195/sq ft ($475 less $280) for the house itself. A seasoned builder could possibly replace the house at that cost but it would be close. What should the headline read?
“Craziness Continues in 2013 – Toronto house sells for $100,000 over asking!” or
“Toronto house sells for replacement cost!”
Whatever your views we know there are 8 couples remaining from that night who still have to find a house downtown.
On Jan 31 a 2 bedroom condo sold in a boutique building in the same neighbourhood.
It was listed for $449,000 and sold for $440,000 in 15 days. Very fast for a condo in January and that speaks to the status of the building as they are not all equal.
This condo had 825 sq ft of modern space with a locker, parking and a 95 sq ft balcony.
It also had a $473.14/month maintenance fee.
Using the same calculation we get a ($440,000/825) = $553/sq ft purchase price.
So the condo is $553/sq ft and the house is $475/sq ft. The condo is 12% more expensive than the house and the house is sitting on a piece of land that represents 59% of its value. The supply of land is capped as we all know. I believe that the house is much better positioned to both increase in value as time passes and to better handle any short term market correction than the condo.
Very few people can claim to have correctly predicted the future and as the saying goes even a broken clock is right twice a day. There are many factors that will affect the next year or two but in the next decade I do not believe that condos will be an attractive investment when compared with freehold properties (both single family homes and rentals). Furthermore as a freehold property owner downtown I have no plans to sell and I continue to see buying opportunities. In a rising tide all boats will float but in our next cycle the choice of property type and the selection of an individual property will become much more important.