Toronto Condo Market

by Darrin DeRoches November 25 - December 1, 2010

The Toronto condo market is making a huge turnaround at a time when everyone is saying the Canadian real estate market is overvalued by 10–23 per cent. What’s up? Well, the CIA is involved, and you should take notice.  Who is this CIA and why should anyone listen to them? CIA stands for condo investment agents.  They are a new breed of agents and brokers who build up a corral of investors and go into new condo projects and buy units at a discount before they go to market.  Sounds simple enough; what’s the catch?     In simple terms, the condo developer loves the fast sales and it enables them to get their financing in place to do the project.  The CIA gets their commissions, and then the investors wait for the project to be built, which takes about two years.  The condo’s value should rise about 10 per cent, and the investor probably got about a 10 per cent discount when buying the condo two years before, for a profit of 20 per cent.  Then the investor rents out the condo, which covers the mortgage and monthly costs.  It all sounds pretty good.  Again, what is the catch?  The catch is that the market can change, and that possible 20 per cent profit could turn into a 20 per cent loss.     Insiders have said that these CIA purchases represent upwards of 60 per cent of new condo sales.  That number of units could crush a development if the market takes the expected 23 per cent hit.  This could cause a serious meltdown in the Toronto market, which in turn will hurt all the markets in Southern Ontario.  In today’s terms, a condo in Toronto is going for $493 a square foot, and in Hamilton $300 a square foot is top dollar.  In two years these condos could flood the market, with rents that will not cover the costs. Investors will walk away and the banks will have a huge inventory of overpriced condos.     It’s possible that the market may stay the same, and the investors will make a return. It is an interesting time in real estate right now, with so–called “experts” heralding a crash in the market.  Two years ago when the U.S. market was going through a meltdown, everyone was saying that the Canadian market was going to follow.  This only caused a slowdown in the beginning of the year – by the end of the year, sales had hit record numbers.  The banks slowed down in lending, but all is back to normal now.  One or two bad developments in Toronto could cause another slowdown in our market.  I don’t believe it will be as bad as they say, but there will be a correction in the real estate market in the near future.  Do not sell the farm; just roll with the adjustment and within months it will recover.  If you are trying to predict the future, just watch Toronto.  V                          [DARRIN DEROCHES]     Darrin DeRoches is a local real estate and mortgage broker. He can be reached to answer questions, comments or stories about real estate experiences through this weekly column at mail@uniquerealty.ca.