Why 2013 could be a bad year for the city’s luxury condo market.
The real-estate market is changing, and some experts predict that there’ll be a 25 per cent downturn in prices over the next half-dozen years in Toronto. You’ve probably read at least one headline about a huge crash in 2013. It’s important to keep in mind that these forecasts look at the market as a whole—as an average. Within every average, there are numbers that are both higher and lower, so it’s safe to assume that some segments may increase while others drop. I believe that this city’s so-called luxury condo market is in for a whopping decline.
The problems at Trump Tower are well-documented: construction delays, redesigns, over-valuations, prospective buyers unable to obtain financing. Buyers tried to walk away from their contracts and deposits, and ended up being sued by the developer. (The developer also faces a lawsuit from a group of investors.) But I have no sympathy for the unfortunate people who borrowed and leveraged up the ying-yang so they could purchase a property with Trump’s name on it. The old adage that “you should only gamble what you can afford to lose” comes to mind. Buying a unit in any of these luxury hotel-condo buildings—Trump Tower, Shangri-La, Four Seasons—for three times as much as you’d pay for one in a different building is exactly that: a gamble.
I cringe when I hear the word “investment” used to describe condos being sold for an astonishing $1,900 per square foot, as they were for Trump Tower. If by “investment” you mean “speculative, risky, illiquid, and uncertain,” then I suppose borrowing money from your elderly mother’s RRSP to pour into a multimillion-dollar pre-construction condo is an investment.
But where did these investors believe prices were going? Up to $2,000 per square foot? Twenty-five hundred? And even if that had happened, who would have been their target buyer when it was time to resell? (I use the past tense because many buyers have swallowed their deposits and wiped their hands of these projects entirely.) I don’t doubt the quality of these projects, but rather the necessity. How many proverbial Saudi oil magnates who want to buy multimillion-dollar units at these upscale hotel-condominiums are out there? Frankly, there’s just not enough money in Toronto to sustain this bloated level of high-priced inventory.
What’s the result? My guess is that many of these luxury units could drop by 30 per cent in value, and some, it seems, already have. I spoke to a mortgage broker who said that appraisals for some properties at Shangri-La are coming in at 25 per cent less than what people agreed to pay for them three to four years ago. Much of the problem has to do with the hotel-condominium setup, whereby the condo and the hotel are in partnership—any issues with the hotel (including financial ones) become issues for the condo and, therefore, individual condo owners. It’s no surprise that many lenders don’t want to touch this kind of arrangement.
If square-footage prices drop from $1,600–$1,900 to $1,200–$1,300 (which I still think is an insane price for any of these units), then there’s your implosion of Toronto’s real-estate market. But that’s just one segment of the market. I’m a firm believer that there are gains ahead for houses in popular neighbourhoods like Leslieville, Riverdale, Leaside, Bloor West Village, High Park, and about a dozen others. I wouldn’t be surprised to see prices increase by 10 per cent in these areas this year, even while the value of multimillion-dollar condos is dropping faster than Halloween candy in November.
And in the end, you’ll get your market average, which won’t tell the whole story. The TSX composite average goes up or down every day, and within that average, there are always stocks that plummet or skyrocket. Home buyers need to realize that the headlines only give you a single snapshot of what’s actually happening, and the best headlines always look to the extremes.
David Fleming is a Realtor with Bosley Real Estate in Toronto, and author of the best known real estate website in the city: www.torontorealtyblog.com. A constant thorn in the side of condominium developers, David’s sarcastic, opinionated, outlandish thoughts can be read daily, although for some people, that’s far too often.