Predictions for the Toronto Condo Market in 2012: Overall, we expect real estate condo sales to go up and prices to remain flat. Our rationale behind this forecast is detailed below. Have a read and send us your thoughts!

Just remember - last year we predicted sales and prices to go up despite most everyone else predicting the exact opposite...and we were right!

2011 IN REVIEW:

At this time last year, we were predicting that Toronto would experience the same sales volumes as 2010 with price increases averaging 5%. We were wrong! Sales increased by 5% and prices were up by 7%. We also forecast that rental rates would increase by $100 per month and we were right. Everyone else, from the Bank of Canada to The Economist Magazine, was forecasting lower sales and lower prices. Those who heeded the experts, in an attempt to ‘time the market’ were the big losers once again. Timing the market is the absolute worst strategy! If you sit on the sidelines and the market keeps rising, you lose significantly. If you are in the market and prices go flat or fall, then all real estate declines (more expensive properties tend to fall further in absolute terms), and it becomes even cheaper for those people in the market who want to upgrade to a more expensive property over time. Too many experts – read economists – try to make residential real estate far more complicated than it needs to be. Residential real estate is all about having a roof over one’s head. You either own the roof or someone else owns the roof and you are a renter. The challenge with this year’s Forecast is to look at both the Pre-construction and Resale Condo Markets and to understand their interdependency.

2012 FACTORS TO CONSIDER:

Interest rates are not going anywhere. Fear mongers keep talking about a rise in interest rates which could lead to problems. What you need to know is that if rates rise, it means the economy is stronger and we have higher inflation. That translates into higher personal income too, which will act as an offset. For those old enough to remember, inflation has always been a friend to real estate.

While the so-called experts worry about the supply of new condos coming to market, they seem unwilling to forecast future demand. For condos, the impact of ‘baby boomers’ moving to condos is still just a trickle. In five years, it will be significant. The next biggest demographic group is the ‘echo’ generation – the children of baby boomers. They are just now entering the real estate market and this segment is focused on condos. Finally immigration to Toronto is not going to slow (80,000 per year) and many of these people will be living down town too.

For the Pre-Construction Market, almost 100% of sales are to investors. No one buys a property to live in that won’t be ready for four or five years. Investors buy condo units either to rent them out (about 40% of the units) or to sell them as ‘Assignments’ (during the occupancy phase and before the units are registered) to end users to live in. So investors look at rental rates and try to anticipate future price appreciation. Currently our market is dominated by investors from Asia, the Middle East, and East Asia looking for capital preservation. American and European investors who are rate of return driven show less interest in our market. Canada will remain a safe haven for the foreseeable future.

There are no new apartment buildings in Toronto. The rental market is being served through new condo construction. The `echo’ generation or Gen X and Y are also the primary renters in this market, and again, they only will rent new – read hardwood floors, granite counters, stainless steel appliances found in condos.

2012 FORECAST BY THE NUMBERS:

For the Toronto resale market we expect sales to remain at the 90,000 level (unlike most other forecasters). Remember that the all-time sales record was achieved in 2007 and Toronto is a much bigger market, in terms of people and incomes than five years ago. So why would sales drop? With a lack of new detached housing, prices in this sector – particularly in Central Toronto will continue to appreciate.

For the Resale Condo Market, sales will be 10% higher than for 2011. We have 18,000 condo units that were completed in 2011 and half of them will be added to the resale market. This extra supply will mean that prices will be flat in 2012, staying in the $500-550 per sf range.

For the Pre-Construction Market, we expect a number of projects that were announced will not be built. By the end of 2011, pre-construction sales downtown were averaging $800 per sf which we believe is unsustainable. The price gap between the resale and pre-construction markets is too big and fewer investors believe that resale prices will rise that fast over the next four years to overcome this difference. Look for prices to fall by $50-75 per sf over the year. Projects selling at over $1,000 per sf (with the exception of Yorkville) will run into severe price problems in 2012.

Bigger sized condo units in the pre-construction market now sell for more per sf than smaller units. This trend will spill over into the resale market. We previously predicted that this would happen. This price differential will only increase as our market matures – just like New York.

Rental rates will increase by another $75 per month. That means the basic one bedroom without parking will increase to $1600 per month. Vacancy rates will remain below 1%.

RE/MAX just released a great report entitled "Home Evolution" that looks at the Canadian Residential Real Estate Market over the past 10 years (2000-2010). Some interesting facts:

• $340B has been spent on Residential Housing Permits
• An estimated $450B has been spent on Renovations.
• The Population during this time has increased 11%
• And 65% of the market has seen housing prices increase by over 100% since 2000 (Greater Toronto Avg Appreciation: 77%)

Click here for the complete RE/MAX Home Evoution Report.

SALES COMMENTARY:

September followed August as another in the string of excellent sales results for the Toronto Real Estate Board with 7,600 sales taking place. This was 25% higher than September of 2010. On a year-to-date basis (for nine months), sales are ahead by 2.6% over last year and we should end the year at just under 90,000 sales – the second best year since 2007. The condo market continued to mirror the overall market for sales.

Looking to October, we expect sales to be only slightly higher than September, which would be the first sign of a slowing market. While active listings are still lower than a year ago (a sign that prices are not about to fall), there are less active buyers over the last few weeks. Mortgage restrictions introduced by the Federal Government in stages are now starting to impact demand. Sellers trying to maximize their price may have missed the peak for now and may have to wait to test the spring market.

Most pessimistic views tend to focus on the downtown condo market. Naysayers look at all those cranes in anticipation of a market correction. But at the end of September, active condo listings were 4% lower than the same time last year (all those new units were either bought by end users or were rented out). The downtown condo sale-to-list ratio now stands at 37% versus 29% last year and compares very favourably to the overall market at 40%.  And trends going forward such high gas prices, traffic congestion and higher utility costs can only favour the downtown condo market.

In this Report we looked at the Bay Street condo market which is popular with both investors and end users who work in the downtown core. One of the newer, taller and perhaps most popular buildings are College Park. We looked at sales in both 761 and 763 Bay. The hottest unit, a one bedroom plus den with parking and locker sold in May of this year for $525,000 at 761 Bay. It occupied 755 sf on a mid level floor (the twenties) and sold for $695 per sf. Previously, the same unit sold in February of 2009 (the bottom of the real estate dip) for $365,000. That is a 43 % increase in 28 months! The second unit we tracked was at 763 Bay, a two bedroom plus den with parking and locker. It sold in April of 2008 (before the market dip) for $510,000 and then again in June of this year for $621,000. At 975 sf, that is a price of $637 per sf and a price appreciation of 22% over 38 months, or about 7% per year, which is consistent with our market. We also checked another sale of a small one bedroom with parking at 763 Bay and the price per sf was $750 on a sale that took place just last month. It is safe to say that condo prices on Bay Street are the highest in Toronto outside of Yorkville.

RENTAL COMMENTARY:

The rental market downtown is extremely tight. Multiple offers on rentals are not uncommon. In September 25 Studio were leased at an average price of $1350 per month, but the average list price was only $1320. Go figure! Over 215 one bedroom units were also rented from a low of $1550 without parking to a high of $1800 for a den plus parking. These are the highest rental prices we have seen this year. The market for two bedroom units, with over 125 units being rented, ranged from a low of $1900 without parking to a high of $2500 on average for a unit that included a den and parking.  Days on market ranged from 3 to 10 days on average, depending on the unit. That is the shortest period we have seen. Tenants get your running shoes on. Don’t start shopping without a filled out Rental Application and an Employment Letter.

As expected, today the BANK OF CANADA announced that it was maintaining its target for the overnight rate at 1%. The Bank Rate is correspondingly one and a quarter per cent and the deposit rate is three quarters of a per cent. Economists do not predict an increase in the overnight rate until the middle of next year.

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels. Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year. Domestic demand is expected to remain the principal driver of growth over the projection horizon, though at a more subdued pace than previously anticipated. Household expenditures are now projected to grow relatively modestly as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth and confidence of Canadian households. Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment. Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The financial institutions will also keep their Prime Lending rate at 3%. Fixed rates have remained steady at record low rates of 3.49% for a 5 year fixed term while variable rates have risen rates to 2.90% or Prime.

The next Bank of Canada Rate Announcement will be on December 6, 2011.

The Oakville, Milton and District Real Estate Board released their September Real Estate Market Report.  In brief, sales of existing homes in September 2011 totalled 765, up 12.7% from September 2010.  This increase was most significant in Milton.  The average price in Milton rose 16 percent to $437,293 year-over-year, and 5% in Oakville where the average price in September totalled $582,316. For the full report, please click on the link below

September 2011 - OMDREB Market Report

SALES COMMENTARY:
August was another strong sales month in Toronto. The Toronto Real Estate Board (TREB) reported 7,500 in sales – 24% higher than for August last year. In the total condo market, sales were ahead by the same percentage. However, Downtown condo sales were 30% higher. What is more impressive is that the sale-to-listing ratio went up from 34% a year ago to 42% this August in spite of more product. A balanced market – between buyers and sellers – is usually 25-35%.

The real question for many is: how will this market perform going forward? We are expecting about 7,000 sales in September.  While this will be down from August, it is consistent with the seasonality of real estate sales.  October is usually the largest sales month in the fall. If you want an early indication of the market for 2012, just watch the numbers for October and November for a clue.

But for most people it is all about the prices. While we hate talking in generalities about prices per sq. ft. for the overall market, our feeling is that prices are about to level off. In the condo market, there are really two markets. The pre-construction or new condo market is fuelled by investors who then rent or resell their units into the resale market for end-users which gets reported as TREB sales. Investors are only concerned with prices and our new projects are now approaching the $600-700 per sq. ft. range. Only ten years ago we were talking $300. On the other hand, New York prices have been at the $1,000+ range for several years and are not moving much. We all like to compare ourselves to New York but we are not New York in terms of either money or appeal. Resale prices are always lower – today about $500-600 per sq.ft. Investors only buy if they believe they can sell for more later and the price difference with New York is now quite small. And if pre-construction does not move higher, then neither will resale.

So let’s look at actual prices in the Distillery District. – just east of Downtown. We selected a building that appeals to people who like the soft loft feel and has minimal amenities, which keeps condo maintenance fees low. The building is 80 Mill Street and with 1965 units, has a good sales history. The first unit we tracked was a one bedroom plus den with balcony and no parking. At 640 sq. ft., it sold for $303,000 in June of this year. That’s $473 per sq. ft. The same unit sold in 2007 for $237,000 and in 2006 for $223,000. The price gain is 36% over five years. The second unit was bigger at 974 sq. ft. It is two bedrooms two baths, with den and parking. It sold in August of this year for $435,000 or $446 per sq. ft. The same unit sold the year before for $395,000 which represents a 10% increase. So why are these units selling below the $500 per sq. ft number? First the east side of Yonge St. has historically sold for about $50 per sq. ft. less than the more popular west side of Yonge. The building is also ten years old and has limited amenities which eliminate a lot of first time buyers.

RENTAL COMMENTARY:
People renting in August are now looking to the fall market. The lead time from renting to occupancy is about 45 days on average. In August the downtown condo market leased out 19 studios, 256 one bedroom units and 174 two bedroom units. This was about 20% lower than in July. Studios were renting for $1275 per month. The entry level for a one bedroom unit without parking is now $1500. The most popular unit is a one bedroom plus den with parking which now rents for about $1725 on average. Two bedroom units start at $2,000 per month and rise to over $2500 on average for two bedrooms plus den and parking. If you can find a three bedroom unit (three were leased in August), you can expect to pay over $4,000 per month.

Market still going strong with June being the biggest sales month of the year so far!!!   Read on for more details.....

SALES COMMENTARY

Toronto Real Estate Board sales in May were just over 10,000 units. This was 6% higher than for May in 2010, and marked the first month this year where sales exceeded the same month in 2010. That trend will continue for June. We are looking at 10,000+ sales and June will be the biggest sales month of the year. Furthermore, expect every month for the balance of 2011 to surpass that of 2010. The final year end count will show that 2011 sales are greater than 2010. No one predicted that, except in this Market Report!! 

All condo apartment sales in May were just 3% higher than for May in 2010. Downtown condo sales were also ahead by 3%.  Unexpectedly, sales in the Etobicoke waterfront were down by 19% from May of 2010. Part of the reason was the introduction of several new pre-construction projects in a market much smaller than downtown. This had a negative impact on the resale market.

However the real brake on the real estate market has not been rising prices, but the lack of listing inventory. Even in the downtown condo market, with the registration of several major condo buildings that has increased product in the resale market, the sale to list ratio has risen from 32% last year to 38% this year! 

The problem is that most experts cannot measure rising prices. Just look at the TREB stats for May. The average price for downtown properties west of Yonge St. was $370,000 – the previous May it was $373,000. East of Yonge St., the average was $405,000 and in May of 2010 it was $360,000. Now anyone who knows the market will tell you that prices west of Yonge for similar units are 10% higher than the east side. And buyers can tell you that prices certainly have not fallen over the past twelve months. But that is what the stats say and the experts rely on this information to tell you what to do in real estate! Of course the problem with averages is that if the mix of sales changes over time – one year more expensive properties sell- then the resulting averages are meaningless. And this always happens. That is why this Report only tracks price changes over time for identical or similar units to get a real price change in the market. Unfortunately the experts don’t have access to this information. 

In this Report we looked at sales at 21 Carlton St., The Met, a four year old building. It is just steps from the College subway station, and is located between U of T and Ryerson Universities. You can’t find a better building for Generation Y or for investors. The first unit we looked at was a one bedroom plus den with two baths, parking and locker on a high floor. It is 680 sf with a balcony. It sold in 2011 for $407,500. It previously sold in November of 2007 for $330,000.  This represented an increase of 24% over 42 months, with a price just under $600 per sf. This is the most popular style of unit in downtown Toronto. The second unit we compared was a two bedroom, two bath unit, with parking and balcony. It is 870 sf. It also sold this year for $469,000 and previously in August of 2008 (before the market correction) for $457,000. You could argue that the person bought the unit in 2008 at the peak of the market- exactly at the wrong time – yet it still increased by $12,000 in 29 months. This unit is now selling for $540. Two points we can make: there is no wrong time to buy, provided you hold the property for at least three years; and over time the price appreciation in Toronto has not been speculative but steady.

RENTAL COMMENTARY: The studio market continues to be one of the best segments for investors. In May, 29 units were leased at an average price of $1300. One bedroom units without parking were leasing for $1400. Parking will add another $100 per month. One bedroom plus den units leased for $1600 to $1650 per month with parking. In total, over 400 one bedroom units were leased in May as we enter the seasonal peak of the rental market. Two bedroom units start at $1900 without parking and will average $2400 which includes a den and parking. 150 two bedroom units were leased in May. The rental market is tight – units are staying on the market for 10-15 days on average and investors are getting close to 100% of asking or list price.

While year-over-year April sales are down, preliminary results for May suggest that things have already picked back up!  We just need some more properties on the market to satisfy all those hunger buyers...and if we could throw a little sunshine in too, that would make for a great Spring/Summer!

Click here for the complete report:   http://www.jeffjohnston.net/account/29f51c722ea52918/pdfs/CondoReportMay11.pdf