A lot of you have us at GHAR questions about the future of the condo market in 2012 and later; more specifically do we think there is a condo bubble, and will it burst? I thought I will throw some light of the expectations for the condo market, especially for investors who are considering different options today.

Have a look at the statistics:

This past year we had another solid year for appreciation of condos in the GTA. Year over year we saw an increase of about 8.2% from December to December. In terms of returns,  if you had your condo 100% paid off (congratulations to you) meaning no mortgage,  your investment would have grown by 8.2%. If it was 50% paid off, you would have seen a 16.4% return, 20% paid off would have seen a 41.1% return and 5% paid off would have seen a 164.5% return. The effect of leveraging your investment is pretty incredible. It’s good to note though that investing smaller amounts also has greater impacts if the market were to swing the other way. For instance, if someone with only  5% down would have lost 100% of their capital if the market had dropped by  5%.

We get a lot of questions about whether we’re going to see lower prices this year. Seems like there are many news reports indicating we will. I don’t think we will. As long as the financing rates remain low our employment rate stays somewhat healthy, and immigration continues at its present rate,  significant or prolonged drop in prices is not going to happen. Looking at the last 7 years of growth in the chart below, we can see sharp increases in prices testing the limits at times but soon continuing upwards.

Now the million dollar question, what is our opinion will happen in 2012? Well here are the facts 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. Remember, inflation has always been a friend to real estate in the past.

• 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 down (80,000 per year as a minimum) 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 – with hardwood floors, granite counters, stainless steel appliances found in condos etc.

2012 FORECAST BY THE NUMBERS:

• For the Toronto resale market, expected sales will 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. There are 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.

• 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. This price differential will only increase as our market matures – just like New York.

• Rental rates will increase by another $75. This means, a basic one bedroom condo without parking will increase to $1600 per month. Vacancy rates will remain below 1%.

Overall, it is very difficult to predict the real estate market future- no one can predict that- not now, not in the past nor in the future. But at the end of the day, whether prices rise or fall during a short span of time, property prices will always rise over a long period of time- especially in Toronto. The other point to consider is the risk involved in investing in stocks these days. If investors want their investments to be safe and growing, is there an option available today, other than investing in real estate?  

Now our word of advise for 2012. We understand that you must have alot of friends who made money flipping pre-construction condos, but in our oppinion those days are gone. We should all go back to the basic principle of: Invest don’t speculate! When your RRSP’s go down in value do you rush to sell them? No you hold on to it with the understanding that the market is all about averages and will eventually increase. Real estate is no different. Pay attention for cash flows and not sheer appreciation. It is true that  the property prices for condos or single homes are still one of the lowest in the world, when compared to similar cities around the world but the golden rule in real estate – location, location, location – still holds true. It is, has been, and will always be about the quality of investment.