Why Condos Are Back

I often go on about how great I think houses are as an investment in Toronto. They are in limited supply in a growing city, and there are very few builders planning to build any more. Condos, on the other hand, are in great supply, particularly high rise condos. Many have even set off the alarm bells that they are in oversupply.

I am not here today to prattle on about how many condos are in Toronto. You can easily lift your head up downtown and take a 360 degree look around the city. It's changed. No doubt about that. Still, I am here today in praise of condos. At this particular moment in time, condos are not looking so bad - at least if their windows are not falling to the street below.

So, why now? What has changed?

Well, here's a few reasons.

1. There's less condo inventory than you think.  For years now, everyone has been worried about the unsold condo units in Toronto and the pace of new condo units added to the existing inventory. It's a pretty fair concern to have. A growing number of unsold units could indicate that there is too much supply and not enough demand. The truth is, according to Urbanization Inc., the number of unsold condos in Toronto have dropped 13% in the second quarter of this year compared to a year ago. Simply put, more condos were sold this year than last year. The number of unsold units sits at around 17,700 this year compared to the 20,800 unsold units from last year. This may be a sign that this worrisome clump of unsold condo units are actually being absorbed. Should we break out the party hats and uncork the champagne? That may be a bit hasty, but some may consider this a sign that the condo market has come back from the brink of oversupply. 2013 and 2014 where the two years to watch in terms of the most new condos hitting the market. We have passed those two years. From 2015 onwards there will be fewer new condos coming to market.

2. Affordability. Some may be wondering why there are so many people buying condos. Well, a lot of this would have to do with affordability. In other words, houses of all sorts and even lowrise condos have been performing incredibly well in terms of appreciation.  In the last few years, some of these have seem double digit increases making them more and more unaffordable to a larger number of people. So where do they turn? To high rise condos that are more affordable and have not been increasing in price the same way in the past five to seven years as their smaller cousins.

3. There are still investors out there. Though I do believe many of Toronto buyers are largely those who plan to live in their condo units, there are those investors out there who buy up our city's condo units. And in case you have not noticed, the Canadian dollar has been slip sliding away. It was not too long ago that we were on par with the U.S. Now that we're hovering around 75 cents to the U.S. dollar. U.S. investors appear more keen to buy here now for the simple fact that it has become a whole lot cheaper for them.

4. Condos are in awesome neighbourhoods.  For those who truly embrace downtown life, then condos are a reasonable option. A house in a central and established areas would most often clear a million dollars provided it didn't need to be gutted. For some, an affordable house is too far away. These days, if you like to walk to work and to the gym and be near a subway, condos are the best bet.

5. Lifestyles are a changing'. Travel seems to be a high priority for a lot of people these days, especially those who don't have kids or your kids have grown up and left the nest. These folks want to be able to leave on a European or Pan-Asian adventure for months at a time or spend several weeks up at the cottage. Houses are too much work and maintenance. Condos supply the security and the lock-it-and-leave-it option for extended periods of time.

Now, to be clear, I don't want to suggest that there is nothing that could throw the price appreciation on condos off their course. There are. Rates could go up by leaps and bounds. There could be external factors - another world financial crisis, for example. There could be an element of fear that comes into the Toronto market as a whole that could bring prices down. My point here is to say that the oversupply argument that so many have been using for the reason that condos will crash does not seem to be taking hold. The panic over the oversupply of condos may not hold as much bite as many have anticipated. Once again, the art of predicting when a real estate market will change has proved to be tough to do.

Is Bigger Better For Your Condo Unit?

For the past three years, the Toronto condo market has been quite predictable, maybe even a little boring. It is not like the often competitive, battle-heavy housing market where prices have shot up each year due to low inventory and high demand. Condos have had humble results in the past three years. In many neighbourhoods and buildings, there have been modest price increases. While in others, there have been slight declines. Overall, particularly in the past year, the condo market has shown some respectable price gains.

But something new is starting to take shape here in the Toronto condo market that will change, and complicate, how the condo market functions. It's true that when you buy a condo, you need to be very aware of the neighbourhood in which you are buying and the health and appeal of the building to have the best return on your investment. That will not change. What will change, in terms of an increase in value, has to do with the size of your condo unit. Bigger can be better. And when I say bigger, I'm not talking about a few hundred square feet here and there. I'm talking about the big condos, the ones that are large two to three bedroom units, a house alternative if you will. They may soon become the condo with the best return on your investment.

But why is that? It was not long ago that Toronto developers avoided building too many large condos, particularly three bedroom condos, because they had a hard time selling them. The demand was for smaller condos, not the big ones. In cities like New York, the practice of the developers was different. They did build larger condos because the people of New York are much more accustomed to living in apartment buildings for their entire lives. In Toronto, it is still mostly a new phenomenon from the past few decades. So, compared to some large cities, Toronto did not build very many big condos because the demand was not there.

But something has changed. There is an increase for the demand of larger condos in Toronto, more than ever before. To understand this, you need to look at how houses are selling in this city. Many first time buyers have become wary of the bidding wars for houses and are now looking for house alternatives. They can live closer to downtown, and they don't have to compete for a condo unit as much as they do for a house. They have consistent maintenance fees, and do not require a large renovation budget. Plus, they don't have to commute from far away if they work downtown.

Also, we have the boomers changing everything again. As they downsize from their larger homes, they are looking to be in the city, close to restaurants, their kids (if they have any), and they don't have to mow the lawn or shovel the snow. Plus, if they want to take off to Florida or Spain for four months, they can lock and leave their condo and go. As a group, they have the money for, and the desire for, larger spaces, and will not settle for less. Many have not grown up in an era where they had to live in a tiny bachelor apartment for a portion of their adult life. Real estate offered decent space at an affordable price in their lifetimes for the most part.

Condos may not be for everyone, but there is a growing demand for the big condo. And since developers have not built very many in Toronto's most recent construction boom, we have a classic case of low inventory and high demand in the making. In my opinion, this will likely lead to above average price appreciation on these bigger condo units down the road.