Nobody wanted to warn me, eh?
No head’s up?
I mean, I suppose it’s my fault. I’ve apparently been living under a rock for the last fifteen years. That, and it turns out that I’m incredibly naive.
I should have seen this coming but for some reason, I decided that my glass would be half-full for a change.
But a small nudge; just a minor warning, would have been appreciated.
Because boy-oh-boy I was not prepared for the veracity, volume, and downright nastiness of these user comments on YouTube.
Remember at the end of 2023 when I wrote that I would be launching a podcast this year?
One TRB reader commented, “Oh great, just what we need, another real estate agent doing a podcast.”
It was sarcastic and playful but he wasn’t exactly wrong. The Internet is littered with content and there’s no shortage of opinions on real estate.
But it’s something I’ve always wanted to do. It’s like a verbal blog and it’s accessed through different mediums and can reach a different audience than those who are accustomed to reading TRB on their phones or computers.
Two weeks ago, I launched this episode: “Why Now Is The Time To Buy A One-Bedroom Investment Condo In Toronto”
The podcast is on Spotify and Apple Music, but the video itself is on YouTube.
We launched the podcast on Sunday and by Tuesday morning there were already forty comments!
If you strip out the Russian bots selling crypto-currency, there were definitely fewer than forty real comments, but the comments from actual users were not what I’ve grown accustomed to on TRB.
In this forum on TRB, the comments are insightful, intelligent, and above all, respectful. When readers disagree with my thoughts or opinions, or those of other commenters, they have no problem sharing alternative viewpoints, but there’s no name-calling and mud-slinging.
YouTube is a different world, man. Wow.
I mean, I get it. I can see it from their perspective.
A real estate broker starts a podcast called “The Last Honest Realtor,” which was supposed to be tongue-in-cheek, funny, ironic, and playful, but seems to be rubbing people the wrong way. Then he goes and puts out a video telling people “now is the time to buy a condo,” when all the media attention is about a weak condo market.
It looks bad, right?
I suppose it all depends.
What causes a person to comment SIX times on the same video? What is it about the content of the video, or the title, or the opinion expressed, that makes somebody so angry?
I have a theory and some of you might not like it. The person who commented six times on my video might not like it. And at the risk of doubling down as the “last honest asshole realtor who is luring people into financial ruin,” let me provide this take:
People who do not want to take financial risk, in the pursuit of financial gain, do not want others to do so either. Above all, they do not want the prospect of financial gain to be real.
Do you see where I’m coming from?
I understand that random YouTube commenters have no idea who I am. To them, I truly am the jerk with an arrogantly titled podcast telling people to buy into a bad market. But I don’t think these people listened to the content of the video, otherwise they might actually be convinced.
And for those that do know me and who have been reading TRB for years, I’ll say this:
I really, truly do believe there are opportunities in the resale condo market that will prove to be spectacular investments in 12-24 months.
If I didn’t, then I wouldn’t have bought one of the condos that I described in that very same podcast.
But before we get to that, how’s this for a headline:
“Toronto’s Condo Market Is Facing Its Biggest Test Since The 1990’s Recession”
Financial Post
July 29th, 2024
Who in their right mind would buy a condo when there are headlines like this out there?
Me.
That’s who.
But did anybody actually read the article?
The problem isn’t in the resale condo market. The problem is in the pre-construction condo market. And if you read the article, do the math, and follow the trail of bread crumbs, you’ll see that this is actually going to create a deficit in the condo market in the near-term.
From the article:
“The GTA condo market is in a state of economic lockdown,” they said.
The problem is prices are too high for investors, which make up 70 per cent or more of presale buyers, and developers can’t lower prices because of high construction costs.
“As a result, new condo sales — the primary driver of new home construction in Canada’s largest market — have dove off a cliff to their lowest level since the late 1990s,” said the report.
Oh, I’m sorry, you’re talking about new condo sales? Pre-construction?
Uh-huh.
Maybe that should have been mentioned in the title of the article?
No kidding prices are too high for investors!
This is why I have never sold a pre-construction condo, in my entire career.
The article continues:
The percentage of pre-construction condos that are pre-sold is now at less than 50 per cent, the lowest in 20 years or more. Since a project can’t begin construction without at least 70 per cent presales, this is “dramatically” slowing the supply pipeline.
“This reality will result in a sharp pull-back in completions and a stagnating housing stock in the coming years, which is sure to make the affordability situation even worse,” they said.
Sorry, speak into my good ear. It sounded like you just said “make the affordability situation even worse.”
You mean that as nothing gets built in the next 1, 2, or 3 years, then condo completions down the line will be non-existent, and there will be a shortage of condos?
No kidding.
Go to Google right now or when you’re finished reading this article, and type “Toronto condo market” into the search field.
What do you see?
No shortage of articles about how bad the condo market is.
And why would anybody buy a condo now, right? Why would anybody launch a podcast suggesting that now is the time to buy a 1-bedroom condo?
Well, quite simply, because it is.
Have a look at this:
This is an advertisement for a pre-construction condo assignment that’s currently up for sale.
The buyer paid $693,990 for a 427 square foot condo.
That’s $1,625 per square foot.
That doesn’t include the development charges which would probably be around $25,000, but could be substantially more depending on the original APS that was signed.
All told, the net cost of this condo could be upwards of $1,700 per square foot.
Also, the buyer who closes on this condo will also have to front the HST rebated portion and spend 6-12 months waiting to get it back.
That price is absurd.
But again, and I’ll underline it for emphasis, this is why I have never sold a pre-construction condo in my entire career.
This buyer is trying to assign the APS for $579,990. That means the original pre-construction buyer is going to accept a loss of $114,000.
Wow!
Shall I provide you with an underlined statement again? No? Alright.
So when you read headlines that say, “The Toronto Condo Market Is On Its Knees,” maybe, just maybe, there are different segments of the condo market? And maybe not every condo was purchased for $1,700/sqft in pre-construction and features a buyer who is looking at a six-figure loss?
The funny thing is, so much of the media attention on the sluggish condo market over the last two weeks came from one single report from Urbanation.
Let me show you an excerpt from the report and I’m going to bold a few words:
The GTHA new condominium market reported just 1,688 sales in Q2-2024, down 66 per cent year-over-year and falling 70 per cent below the 20-year average.
New condo sales in the first half of 2024 totalled just 3,159 units, a 57 per cent decline from a year ago and 72 per cent below the 10-year average. The real estate firm says the first half of 2024 was the slowest for new condo sales in the region since 1997.
The drop in sales during the second quarter also pushed the total unsold inventory to a record high of 25,893 units, a level that was roughly 10,000 units higher than both the 10-year and 20-year averages.
Only 727 new condo units started construction in Q2-2024, a more than 20-year low that brought the latest four-quarter total down to 9,182 units — a 67% plunge from the 28,026 units that started construction during the annual period ending a year ago in Q2-2023.
Be honest: is this insightful or annoying?
Because if you’re a market bear or you’re the Internet dweller who is afraid that there could be financial opportunities in the resale condo market but you don’t have the capital or the desire to act, then surely you’d find this to be condescending.
But it isn’t. It’s just…..accurate.
“The condo market” is a very broad term and it encompasses multiple segments that could be divided by price, geography, size, or style. But in Toronto, based on the way that condominiums are developed, we have the ability to divide the condo market even further into two vastly different segments that, in my opinion, now represent “night and day” in terms of their differences:
a) Resale Condo Market
b) New Condo Market
Further from the Urbanation report:
“The continued weakening in condo market conditions during the second quarter of 2024 is likely to cause more projects that were slated to launch this year to remain on hold, while others that are struggling to meet sales thresholds for construction financing may ultimately be pulled from the market.”
New condo launches are being paused.
Existing condo projects are being canceled.
Yes, without a doubt, this is a bad sign for the pre-construction condo market. But all this does, yet again, is illustrate the fact that a massive deficit in condominiums is on the horizon.
Not only that, we haven’t even begun to talk about prices.
As I noted in my podcast, my Pick5 video, and even the blog that I wrote about the GTA condo market on July 25th, the cost to build condominiums in 2024 is exorbitant.
From Urbanation:
Average asking prices for unsold units declined 2.6% over the past year and by a total of 4.5% over the past two years to an average of $1,361 psf. This demonstrates how sticky new condominium prices have become due to high development and financing costs, and record prices paid for land at the market peak.
If it’s going to cost developers $1,000 or $1,100 per square foot to build a condo, then they have two options:
1) Continue to sell condos in pursuit of profits, which means an average of $1,400/sqft (per the Financial Post article)
2) Don’t sell any new condos.
If developers choose option #1 and buyers are buying, then there’s a “floor” of sorts in the condo market. And if pre-construction units are selling (which they are not, but rather this is for illustrative purposes), then the resale condo market will move as well.
If developers choose option #2, then the deficit of condos in 24-48 months is guaranteed.
But in all of this, one point seems to be missing. One reason for my thesis, if you will, has yet to be examined and/or accepted or rejected by the market bears, and it goes like this:
If the cost to build a new condo is $1,000 per square foot or more, then how in the world is buying a resale condo for $780/sqft a bad investment?
Tell me. Because I would really like to know.
If resale condos are available to purchase for well below replacement cost, and in some cases – half of what pre-construction condos sold for 4-5 years ago (albeit at ridiculous and inflated prices), then again, I ask how a current resale condominium is a poor investment.
But let me come back to that shortly because I’m going to explain with evidence, namely by describing the condo that I purchased.
The last point that I want to make, which might seem obvious in hindsight, is that interest rates are about to decline and it’s going to take an exceptionally well-crafted argument to convince me that resale condominium prices are going to decline as the Bank of Canada overnight lending rate is cut in half.
Recall this graphic that I showed you in the spring from our friends at Outline Financial:
These are the forecasts by the Big-Five banks, plus NBC, as they stood in April.
TD, RBC, and NBC predicted a 100 basis point cut by the end of 2024, while Scotia, CIBC, and BMO predicted a 75 basis point cut.
We saw a 0.25% cut on June 5th.
We saw a 0.25% cut on July 24th.
The Bank of Canada has announcements scheduled for September 4th, October 23rd, and December 11th.
It is widely expected that we will see 0.25% rate cuts on both September 4th and October 23rd.
Here is the other slide from April showing the forecasts from the six lending institutions through the end of 2025:
TD Bank is forecasting a cut from 5.00% all the way down to 2.25%.
And if you read last Monday’s blog post, you’ll see that market predictions have become even more optimistic since this slide was published in April.
There are now predictions of an overnight lending rate of 2.50% by mid-2025.
So let me summarize:
We have seen two interest rate cuts in two months and there are 5-8 more on the way within the next 12-18 months.
Call me crazy, but everything I know about economics, financial markets, and real estate tells me that the real estate market is going to explode in early-to-mid 2025.
I’m generally not a risk taker. I’ll admit that.
And I understand those who don’t have the interest, risk tolerance, wherewithal, or proverbial “stomach” to take a risk in a real estate market that is being absolutely pulverized with negative headlines.
But I see a downtown Toronto condo market that’s in a lull. It’s “asleep” as many have put it, and I also see interest rates coming down substantially, new condominium starts hovering around zero, and an unreasonable disparity between resale condominium prices and pre-construction that will not exist in five year or more.
Oh, and unfortunately, I also see a handful of would-be condo sellers who are desperate.
Not all. And not many. But a handful.
And if you look long and hard enough, there are some exceptional deals out there.
Like the one that I got…
(TO BE CONTINUED – SEE YOU THURSDAY…)