Toronto’s Condo Situation Creates Panic

Toronto condo situation creates panicConsidering that there was a point were condos weren’t going up fast enough in Toronto in recent years, in the last few weeks, prices have been easing somewhat and some developers have either abandoned or reworked their plans for new condo projects.

Toronto condo prices rose 50% in 7 years

Because condo prices have shot up by 50% since 2005, the widespread cautiousness of prospective buyers is beginning to have an effect on the condo market in Toronto.

And while the evidence of a slowdown is merely anecdotal and not statistical at this point, some economists are crossing their fingers that this pricing correction will happen in a moderate and painless way, as this would definitely reduce the potential damage that a crashing decline would cause.

For months now, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have been warning that the building craze of condos in Canada could have detrimental consequences that will ultimately lead to a market crash.

There are more condos in Toronto than anywhere else in North America

According to Urbanation Inc., more than 6,000 new condo units have sold between January and March of 2012 alone, the highest amount ever. Needless to say, developers are doing what they can to cash in on the situation, and there are currently more condo units being built in Toronto than in any other city in all of North America.

Economists at Toronto-Dominion Bank, however, believe that a price correction of at least 15% is expected to take place within the next two to three years, especially for homes in Toronto and Vancouver.

More recently, some Toronto condo projects have had a tougher time selling units. Whereas less than a year ago, a condo project would sell over 70% of the units before completion, now it’s more like 30% or 40% at most.

Toronto condos are not getting financing

Given that banks typically don’t dish out financing until 70% of the condo units have been sold, with some banks not doing so until 80% of units are sold, it’s obvious that the slowdown will begin now.

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1 comment

  1. Nalliah Thayabharan says:

    New Condominium units in Toronto have shrunk in size overall; they’ve gone down by 100 sq ft over the last 5 years on average. We will have to see the impact in the rental market when all the towers now under construction in Toronto hit the market.
    The average size of a new condominium unit in Toronto is 650 sq ft and based on average price, it will cost about $330,000. With rental rates on average $2.20 /sq ft, investors may expect monthly rent about $1,450.
    But will that rent cover the costs for the investor? With 20% down, a $264,000 mortgage at 3% amortized over 25 years, the principal and interest costs would be close to $1,250/month. Monthly condominium fees are about $0.50/sq ft per month on average and property taxes are about 1% of home value. When utilities are added the cash flow becomes negative.
    The condominium market in Toronto, the biggest of its kind in North America for that class of housing, is largely based on a capital appreciation. Most investors finance their condominium units knowing that they will be unable to carry them on a cash-flow positive basis based on present rental rates. The condominium game continues to be about capital appreciation and very small return would shrink the pool of investors.

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