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cashinmattress

Speculators, Foreign Investors, Betting On Toronto Condo Market

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Who in their right mind would invest in something that loses money every month? The answer just might be future Toronto condominium buyers. (or British BTL mortgage holders)

Toronto is the largest condominium market in North American with 18,000 suites selling annually over the past five years, according to research firm Urbanation Inc. The problem is rent for those units is not climbing much, stuck at $2.09 per square foot in the first quarter of 2011 versus $2.09 per square foot a year earlier.

Rental rates are relevant because Toronto’s condominium market has quickly become an investor market with Urbanation saying more than half of the units in the city are now being bought by people who have no plans to live in them.

What it could mean is negative cash flow for anybody buying in the future and hoping to rent. Ben Myers, executive vice-president of Urbanation ran down the numbers for new buildings being sold now which are asking as much as $550 a square foot.

Take a 750 square unit. If you are going to buy the unit for $550 per square foot, that’s $413,000. You put 25% down and you have a mortgage of $310,000. Based on variable rate mortgage at 3% with a 25-year amortization, your monthly payment is $1,475. Add monthly fees of $345 for condo maintenance and $345 for property taxes and you are up to $2,200 in costs.

Newer buildings in Toronto are generating $2.26 per square foot but even at that rate, it only generates about $1,700 per month. Your unit will lose $500 or $6,000 per year, though you would knock of about $45,000 in principal over five years.

“What is going to happen to those buildings when they come on the market? If rents are not any different, are we going to have a major exodus of investors in the market?” says Mr. Myers.

Even the Canadian president of Monarch Construction, which builds high-rise condominiums, questions whether it all makes sense.

“From an investor perspective, it’s not a great investment. This is all about capital appreciation,” says Brian Johnston. “Investors are a big part of the market, it’s 40% or more for us and that’s higher than in the past. It’s mostly Asian investors.”

The influx of foreign buyers is one that Vancouver has almost gotten used to it with commentators suggesting Asian investors have made it the most expensive city in Canada to buy property. Average prices in Vancouver in April soared $801,252, a 21% increase from a year ago.

For some people, buying a condominium is a short term bet. Developers can require up to 25% down on a property but the rest of the cash isn’t due until the building is occupied and later registered.

There could be a three-year gap before you have to come up with cash. If you park $100,000 on $400,000 for three years and it appreciates 10% per year, you are going to pocket more than $130,000 in profit not including costs of selling.

“There has been appreciation in the past but will there be as much going forward?” he said, adding even at 3% appreciation, the investment might work.

But increasingly there are foreign investors in the Toronto market who don’t even care about the appreciation or cash flow issues because they are buying units outright, says Mr. Johnston.

“Look up at some these buildings downtown and look and you’ll notice how many dark units there are,” he says, noting some investors are just happy to leave them vacant.

Benjamin Tal, deputy chief economist with CIBC World Markets, said there are two factors which could help investors. Rental rates should rise as the housing market slows and demand increases.

The other issue remains how much room there is for price appreciation and Mr. Tal says plenty based on foreign investment which is driving the market.

“I cannot think of a more sustainable trend than China growing and Chinese money entering Canada,” says Mr. Tal. “People say it’s crazy, crazy, but it’s the most sustainable trend I can think of.”

There are plenty of naysayers still out there, including Kurt Rosentreter, a certified financial planner with Manulife Securities, who likes to refer to condos as “pockets of air in the sky.”

He says if you want to invest in condominiums in Toronto you really need a long investment horizon. “The volatility potential on condo real estate has the potential to be far greater than normal real estate,” says Mr. Rosentreter. “It’s a game that has worked well but the return on investment [is getting harder]. You have to put so much down and the spaces are getting smaller. It’s only going to get harder as financing gets [more expensive]. I see investment properties in major cities as dangerous because of the rising costs.”

That’s the nature of speculation, of course, and what makes condominiums an interesting financial bet. It comes down to accepting negative cash flow for a bet on price appreciation driven by investors — some of whom we know little about.

I lived in Toronto for years. These condominiums are just your bog standard flat in a tower block, usually built on the edge of urban centres and normally right by a major motorway.

The market there, unless thinks have changed drastically, is not great. Average salaries are around $30k, with managerial positions usually earning you around $50k.

Who are these investors? I presume the same bunch who have blighted England, Ireland, Spain, etc... the usual suspects.

house-of-cards.jpg

Edited by cashinmattress

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They do seem to be about 50% overpriced.

Given Toronto's past booms and busts, it might make some sense to wait for some of the condos in the Front Street / Harbour Front / Spadina / Jarvis "rectangle" to drop to $250 to $ 300 per sq ft.

Some of the "patient" money that I know in Toronto is already building up a war chest and doesn't think that it will spend it within the next five years.

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“I cannot think of a more sustainable trend than China growing and Chinese money entering Canada"

:rolleyes:

Lawyer friend of mine who is involved in the Toronto market says it's the Chinese 'just in case' money seeking bolt holes outside China; US and Europeans. Much of his work involves private money providing the finance - so no banks involved. Anything for a yield, even if it involves capital loss at some point. Some of these people are preparing for a very different future world.

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:rolleyes:

Lawyer friend of mine who is involved in the Toronto market says it's the Chinese 'just in case' money seeking bolt holes outside China; US and Europeans. Much of his work involves private money providing the finance - so no banks involved. Anything for a yield, even if it involves capital loss at some point. Some of these people are preparing for a very different future world.

Might account for the London madness too. A nation of forced renters.

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I lived in Toronto for years. These condominiums are just your bog standard flat in a tower block, usually built on the edge of urban centres and normally right by a major motorway.

The market there, unless thinks have changed drastically, is not great. Average salaries are around $30k, with managerial positions usually earning you around $50k.

Who are these investors? I presume the same bunch who have blighted England, Ireland, Spain, etc... the usual suspects.

house-of-cards.jpg

I lived in Toronto for about 4 years in the seventies and was nearly tempted to buy one of these 'flats' in University City as I hated shelling out rent each month (although rents were reasonable and tenancies stable) - however there were charges, it was all nicely done out but miniscule balconies and v high up for a professed vertigo sufferer. So I came back to the UK and bought a house :lol:

Edited by olliegog

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Markets, and especially modern markets underpinned by a credit market, always act to price out yields by increasing the price of the underlying relative to its income stream.

None of this has to do with growth or 'efficient market allocation of capital or any of that nonsense. Just human greed coupled with human ingenuity that is easily capable of working round clumsy attempts to limit the quantity of money or the speed with which it changes hands.

As you observe, this process is occurring everywhere now.

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Markets, and especially modern markets underpinned by a credit market, always act to price out yields by increasing the price of the underlying relative to its income stream.

None of this has to do with growth or 'efficient market allocation of capital or any of that nonsense. Just human greed coupled with human ingenuity that is easily capable of working round clumsy attempts to limit the quantity of money or the speed with which it changes hands.

As you observe, this process is occurring everywhere now.

Is the "end game" that the capacity to extract economic rent from the system disappears?

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:rolleyes:

Lawyer friend of mine who is involved in the Toronto market says it's the Chinese 'just in case' money seeking bolt holes outside China; US and Europeans. Much of his work involves private money providing the finance - so no banks involved. Anything for a yield, even if it involves capital loss at some point. Some of these people are preparing for a very different future world.

The last house price bubble in Toronto (and Canada) peaked in 1988. From there, prices fell in nominal terms by 30% until about 1996. They held steady until about 2001 when emergency interest rates combined with changes in regulation making it easy to get a government insured loan with minimal down payment caused prices to surge. Average Toronto prices are currently 2x-3x or more what they were in 2001.

Anyway, I bring this up because until 1996, we had a flood of rich folks from Hong Kong establishing residences in Canada ahead of reunification with China. However, that flood wasn't enough to stop the price decline mentioned above. I expect it won't make a difference this time either when the Canadian market finally starts to blow. Immigration and wealthy people coming to Canada (and emigrating from Canada to the US) has long been a constant in Canada.

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Is the "end game" that the capacity to extract economic rent from the system disappears?

Yes.

Some people might from time to time be able to profit by correctly predicting 'asset price noise' but I'd be very surprised if they could do it consistently.

[edit to add: the ability to extract economic rent using money-savings disappears. I imagine there are plenty of alternative methods which do not disappear]

Edited by scepticus

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Yes.

Some people might from time to time be able to profit by correctly predicting 'asset price noise' but I'd be very surprised if they could do it consistently.

[edit to add: the ability to extract economic rent using money-savings disappears. I imagine there are plenty of alternative methods which do not disappear]

Monopoly powers are a major source of economic rent.

The total economic rent paid to monopolists / duopolists (which includes governments in my view) is large and unlikely to disappear any time soon.

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The last house price bubble in Toronto (and Canada) peaked in 1988. From there, prices fell in nominal terms by 30% until about 1996. They held steady until about 2001 when emergency interest rates combined with changes in regulation making it easy to get a government insured loan with minimal down payment caused prices to surge. Average Toronto prices are currently 2x-3x or more what they were in 2001.

Anyway, I bring this up because until 1996, we had a flood of rich folks from Hong Kong establishing residences in Canada ahead of reunification with China. However, that flood wasn't enough to stop the price decline mentioned above. I expect it won't make a difference this time either when the Canadian market finally starts to blow. Immigration and wealthy people coming to Canada (and emigrating from Canada to the US) has long been a constant in Canada.

I'm sure that's absolutely right. Same thing has happened in London for decades. My point was rather than those particular buyers aren't interested in the nominal cost, they're interested in the location. One day they'll be right (as our Irish and Greek friends are finding out).

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The market there, unless thinks have changed drastically, is not great. Average salaries are around $30k, with managerial positions usually earning you around $50k.

They've gone up a fair bit since then:

http://www.payscale.com/research/CA/Location=Toronto-Ontario/Salary

The banks in downtown pay pretty well, an average managerial wage in one of them would be more like 100-130 (including bonus). The people buying condos seem to be the same speculative crowd that bought in the UK with maybe a higher proportion of far-east punters. For all the run-ups in price though, it's still plausible for people who don't earn hedge-fund money to buy reasonable places to live within a bearable commute. The house I bought recently is 2 miles from Bay & Front and came in at 900K CAD, which is a lot of money but about 20% of what a similar place in a similarly nice area of London would cost.

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They've gone up a fair bit since then:

http://www.payscale.com/research/CA/Location=Toronto-Ontario/Salary

The banks in downtown pay pretty well, an average managerial wage in one of them would be more like 100-130 (including bonus). The people buying condos seem to be the same speculative crowd that bought in the UK with maybe a higher proportion of far-east punters. For all the run-ups in price though, it's still plausible for people who don't earn hedge-fund money to buy reasonable places to live within a bearable commute. The house I bought recently is 2 miles from Bay & Front and came in at 900K CAD, which is a lot of money but about 20% of what a similar place in a similarly nice area of London would cost.

Well, for that kind of money you'd need to be a banker or an upper level public sector worker.

You're looking at $7 grand in property tax alone. Sheesh.

I assume you are on rock star wages over there.

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Well, for that kind of money you'd need to be a banker or an upper level public sector worker.

You're looking at $7 grand in property tax alone. Sheesh.

I assume you are on rock star wages over there.

My property taxes are 4.5K for 2011 . I'm earning alright but most of the money for the house came from selling the one I had in the UK (bought in 1990). Either way though, the point stands, houses here aren't cheap in an absolute sense but they're still a long way below central London prices for the most part. Now, Vancouver on the other hand...

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My property taxes are 4.5K for 2011 . I'm earning alright but most of the money for the house came from selling the one I had in the UK (bought in 1990). Either way though, the point stands, houses here aren't cheap in an absolute sense but they're still a long way below central London prices for the most part. Now, Vancouver on the other hand...

My cousin lives in the beaches, near where I used to live back in the 90's...

You must be living in a neighbourhood that hasn't been reassessed. I think the current rate in Toronto is 0.8% of the market value of your home, for purely residential property, that is unless you are getting some kind of discount, or you've made a typo on a previous post.

Here's my reasoning. tax calc

Either way, its a ripoff considering all the rest of the tax you pay in Canada.

I hope you have R2000 rating, because heating is also a frigging ripoff.

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My cousin lives in the beaches, near where I used to live back in the 90's...

You must be living in a neighbourhood that hasn't been reassessed. I think the current rate in Toronto is 0.8% of the market value of your home, for purely residential property, that is unless you are getting some kind of discount, or you've made a typo on a previous post.

Here's my reasoning. tax calc

Either way, its a ripoff considering all the rest of the tax you pay in Canada.

I hope you have R2000 rating, because heating is also a frigging ripoff.

The property tax rates aren't quite as simple as that - different neighbourhoods have different weightings depending on all sorts of things. My house was last assessed a couple of years ago so it fairly up to date and, no, there wasn't a typo, it's 4.5K CAD per year. The overall tax take from my income making some guesses for HST at 13% vs. VAT at 20% comes in at slightly less as a percentage than I paid in the UK in 2009 although there's not much in it - the headline rates for income and property are a bit higher but there's a lot of allowances and transferable amounts that take the actual amount paid down by a fair bit. I definitely spend more on gas and electricity than I did in the UK but I think that's largely down to the more extreme weather than higher charges (and these stupid North American water systems that keep the water hot 24 hours a day don't help). My standard of living is way higher than it was in the UK overall though because I can afford to live much closer to work (and in a nice area) and avoid all the pain of long distance commuting.

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The property tax rates aren't quite as simple as that - different neighbourhoods have different weightings depending on all sorts of things. My house was last assessed a couple of years ago so it fairly up to date and, no, there wasn't a typo, it's 4.5K CAD per year. The overall tax take from my income making some guesses for HST at 13% vs. VAT at 20% comes in at slightly less as a percentage than I paid in the UK in 2009 although there's not much in it - the headline rates for income and property are a bit higher but there's a lot of allowances and transferable amounts that take the actual amount paid down by a fair bit. I definitely spend more on gas and electricity than I did in the UK but I think that's largely down to the more extreme weather than higher charges (and these stupid North American water systems that keep the water hot 24 hours a day don't help). My standard of living is way higher than it was in the UK overall though because I can afford to live much closer to work (and in a nice area) and avoid all the pain of long distance commuting.

Good on you, but I would never choose to live in London myself, and I've done my decade in Toronto.

It's a young persons city, and it is definitely not the city I enjoyed living in 20 years ago, as I do not wish to do the urban commando lifestyle in the plastic multicultural jungle any more.

I'm just glad I don't have to put up with 'Stephen Harpers' government, -30°C winters, CanCon media, pride week, the 400 series highways, boorish city cops, and the crime-wave that is Caribanna.

I did however enjoy the Beaches Jazz festival and the Toronto island on weekends.

If I did have to go back there to Canada, I think I would choose Montreal, or go back to Halifax where I move to after Toronto. Work related.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
      • up 2.5%
      • up 5%



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