November 1, 2011
Most Real estate watchers were excited to report that sales on the Toronto Real Estate Board in October were 17.5% ahead of October in 2010. My take is that October is the busiest month of the Fall Market and sales were ahead by only 2% compared to September of this year. Last year, the September to October increase was 6%! Last month we stated that preliminary October sales may well indicate a slowing of this market and final October results seemed to confirm our views. Looking forward, we are expecting November sales of 7400 units which would only be a 3% drop off from October. Our guess is for a fairly consistent market over the winter.
Currently the downtown condo market frenzy is centred on pre-construction sales. While there are too many launches to count (every downtown parking lot has a sign), the most important factor is to track the `price gap’ between this market and the resale condo market. The resale market is at about $500-550 per sq.ft. The pre-construction market is $700 per sq.ft. and higher in premium projects. In buying, Investors are betting that in four years time, the resale market will rise to pre-construction price levels.
When the price gap is below $100, investors are much more confident. However with the size of the current gap, we believe that some investors will start to pull back and there will be a number of new condo projects that will not be built. Pre -construction prices should begin to level off and in some projects might actually be reduced! Rental rates, which have moved higher by over a $100 a month this year cannot support these pre-construction prices unless rental rates move higher by another $250 per month over the next four years. Is this realistic?
This month, we looked at sales in Palace Pier – 2045 Lake Shore Blvd. on the Etobicoke Waterfront. This is a premium building with great city and water views. While older, it is well maintained. The building represents tremendous value here but the problem is the high condo fees. The first sale we looked at was a one bedroom with parking, locker, balcony and lake view. At 920 sf, it sold for $280,000 in September or just $305 per sf. The same unit sold in 2005 – 6 years ago for $245,000 for a price increase of 2% per year. An identical unit on a lower floor sold for $273,000 in October. Condo fees, which include all utilities, valet parking and shuttle bus to downtown, are almost 90 cents/sq foot per month. Most condo buildings with all utilities included are in the 65 cent/sq foot range.
The second unit we looked at was a two bedroom – two bath unit with solarium, parking and locker which sold for $342,000 in August of this year. It was 1550 sf. and sold for just $220 per sf. Again condo fees are 83 cents per sf per month. The same unit sold previously in 2007 for $318,000 and in 2002 for $264,000. The price appreciation for this unit was just under 3% per year. While high condo fees are certainly a drag on prices in this building, the primary reason for it’s being out of favour is that the condo market is being driven by younger buyers who want newer, smaller, more affordable units. However, over the longer term, we believe that when baby boomers sell their million dollar plus houses, they will need bigger sized condo units (there will be a severe shortage of these in the future) and boomers will appreciate valet parking, regardless of the cost.
The rental market continued to be very active, even though this is usually the slowest period of the year. Studios continue to be in short supply with only 20 units being leased for $1350 on average. Over 220 one bedroom units were leased downtown in October with rents ranging from $1500 for the basic without parking to $1750 for a one bedroom plus den and parking. Over 100 two bedroom units were also leased from a low of $1950 to a high of $2500 with den and parking. As mentioned previously, there is a shortage of three bedroom units. Only two were leased in older buildings at an average rent of $2500. Tenants are paying, on average, a 100% of list price so there is little room to negotiate in this type of market. Landlords are also being more selective with tenants and are demanding good credit scores.
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