Canada's Condominium Magazine

Exceptional year ahead for high-end Toronto condos; speculators and investors more active than previously thought

Spring is here and it is going to be a good one for the high-end condominium market in Toronto, if Sotheby’s International Realty Canada is right. Already this year sales of condos worth more than $1 million are up—“soaring” to use their word—exceeding 2016 levels for the same period by 104 per cent. To date, four condos have sold for more than $4 million in Toronto, one-third more than in the first two months of 2016. Sotheby’s Spring Forecast says that the “exceptional” performance in the top-tier condo market is being driven by a combination of factors, including shifts in demographics, strong consumer and investor confidence, and comparative affordability compared to single-family home prices.

The picture is not entirely without clouds. Sotheby’s notes that Canada’s top-tier real estate market faces “unprecedented” levels of uncertainty this spring, as it absorbs the impact of recent government regulation and policy, and copes with geo-political headwinds on both a continental and global scale. As well, local market factors such as inventory levels, employment, consumer confidence and high demand will influence how the high-end market performs.

Sherwood at Huntington condominiums from Tridel/Concert (rendering) now under construction. The luxury condominium market will have an exceptional year in 2017 according to Sotheby’s International Realty Canada.

Toronto, on the other hand, according to Sotheby’s International president and CEO Brad Henderson, has “pulled into a league of its own,” and the luxury realtors group expects to see “all-star performances” across every luxury segment.

The Toronto real estate market has pulled into a league of its own, and we expect to see all-star performances across every luxury segment—single family and attached homes, as well as unprecedented performance in the luxury condominium market. At the same time, rising Canadian consumer optimism will add positive colour to the markets in Vancouver, Calgary and Montreal in the coming months.

Those “all-star performances” can be viewed differently, of course, depending on one’s vantage point. TD Economics, for example, certainly agrees that the Toronto housing market is “running hot,” forecasting home price growth in the 20–25 per cent range for 2017. But along with that growth is uncertainty, which is also higher than usual due to the risk of more speculative buying in the market. The bank worries that speculative buying will cause home prices to rise uncontrollably without further policy measures. Higher mortgage rates and eroding affordability should cool the market in 2018, but that may not happen if, as the bank believes, speculative demand has become more far-reaching than was previously thought.

Share of GTA home sales greater than $1 million. Source: TD Economics (CREA).

If that is the case, and if “irrational expectations” are playing a greater role in driving demand, then there is a risk that many of the homes purchased in 2016 will be back on the market in 2018 at even higher prices. This, the bank says, will not necessarily create a “massive pop” in supply, but will add to demand pressures that are already constraining supply and pushing prices up. This could reinforce a false sense of security among future buyers concerning the sustainability of the market.

Again, TD laments the lack of “robust data” concerning the role of foreign investors in the market, calling the estimate of 5 per cent, arrived at through surveys of realtors and condo corporations, a low watermark. Nevertheless, it may be assumed that foreign investors are having an impact on price growth in Toronto. The spike in demand for luxury homes noted by Sotheby’s International may be consistent with a push from foreign investors.

One Toronto realtor, John Pasalis of Realosophy Realty, dissatisfied with available data on speculation and investor activity, took matters into his own hands. He found that speculative buyers are responsible for as much as 39 per cent of all sales in some GTA neighbourhoods. Investors “could be responsible” for as much as 30 per cent of all sales. The title of his “special report” leaves little doubt as to his position: How Investor Demand for Houses is Driving up Prices in the Greater Toronto Area.

In 2016, according to Pasalis, investors accounted for 9 per cent of all sales in Toronto. Supporting the idea that investors are drawn to the top end of the market, Pasalis found that the highest demand areas in Toronto were Henry Farm (Sheppard and Leslie) and Lawrence Park North (Lawrence and Yonge), with 22 and 20 per cent of all sales concluded by investors. Average prices were $1,505,500 and $1,653,900 respectively. Average rents were $3,015 and $4,381 per month, respectively.

Source: Realosophy Realty

He determined whether a purchaser was an investor by looking at whether the home was leased shortly after the new owner took possession. He found that the number of homes so leased had more than doubled from 2012 to 2016, and concluded that investors had bought 10 per cent of all freehold homes in 2016.

An interesting contribution to the discussion is Pasalis’s finding that 95 per cent of properties purchased as investment properties in 2016 lost money every month, meaning that the investor had to subsidize his investment to the tune, on average, of $1,121 per month. What this indicates is that the investors are willing to suffer short-term losses in the expectation of making greater gains when they sell the property. Investors further rationalize their decision by assuming that at least half of the monthly “loss” is actually going to pay down the mortgage, thereby increasing their equity in the home.

What is the difference between a speculator and an investor? Investors do not bank on short-term gains in home prices to make a quick profit, says Pasalis. Investors don’t buy rental properties that must be personally financed because the rental income does not cover expenses. Those who do that are speculators, and they leave themselves in a more “precarious” position, should the market take a downturn. His advice to ordinary buyers is to buy “defensively” rather than trying to time the market. His firm has published a guide to defensive buying which may be accessed on their website.

Auberge on the Park-Tridel


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