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.

The Tipping Point: Are Cities Becoming Too Dense?

Do you remember the days when every one was concerned about suburban sprawl? From the 1960s up to the early 1990s, there was deep concern about poorly planned low density suburbs that sprawled away from the city requiring a whole lot of driving to be done. Many city suburbs were poorly planned, and they expanded out gobbling up farmland and natural habitats along the way. 

These days, you don't hear about sprawl very much. As as collective concern, it has vanished from our consciousness. Like holes in the ozone layer and the Cold War, you just don't hear about it any more. But why not?

Well, many cities, like Toronto, have changed their official plan to protect farmland and the natural habitats around the city, or they have developed plans to revitalize the downtown with the idea that this will lead to a healthier, more prosperous city.   In 2006, Toronto changed its official plan so that no one could build any new development in the greenbelt that surrounds the GTA. They encouraged an intensification policy to end sprawl and better use up land in the city limits building up instead of out, when it comes to new development. 

It's a good idea because it is important to have farmland nearby to support a large city, even though we do import a lot of our food. And it creates more of a tax base so we, as a city, can collect more money to invest back in the city. 

Like with suburban sprawl, some argue that poor planning can lead to vertical sprawl. They feel humans will be healthier and happier around nature which, in turn, will bring about a better connection to the world. Building a bunch of high rises will only make people feel alienated from their natural habitat. 

For the most part, more intensification in cities has been seen in a positive light. Urban gurus like American Vishaan Chakrabarti believes we are undergoing something he calls hyperdensity, where cities move from already dense places to very dense/complex cities like London. He defines hyperdensity as enough population to support subway lines. It's the way we are heading in many cities around the world where most of the migration/immigration has been taking place. 

 For Chakrabarti, hyperdensity will work better than the low density suburbs, and generally produces a happier and prosperous community that is more economically productive and sustainable. And he maybe on to something. In the U.S. 3% of America's land mass generates 85% of it's economic activity. In Toronto, 46% of Torontonians walk to work. Cities are no longer seen as decaying and crime-ridden shells, but as a desirable places to live.  

Still, like the worry of the suburban sprawl of the past, intensification requires great city planning, and I'm not sure the city of Toronto has kept up. If we are going to continue along the path to intensifying the city, we need to think of creating better transit, more parks and new schools along the way. 

And what about the suburbs? Are they do be ignored? The truth is, suburbs are still being built outside of the greenbelt. And I can certainly understand their appeal. There is still a desire to live in a place where your house is cheaper and bigger and you can have a yard, even if you need to take on the killer commute to the city. So, they are not going to disappear and stop appealing to people, but they won't be growing at the same rate they once were. In the old inner suburbs of Toronto, in places like Etobicoke, we are seeing a transformation from suburb to something between a suburb and a city. Just take a look on Queensway where you have trendy new condos like Cube down the street from Costco and Home Depot.  It's a mix of every thing suburbs and the city offers: high rise condos, sidewalk cafes, subways, streetcars mixed with bungalows on huge lots, box stores, highways, malls and car-friendly streets. Some may see it as paradise - the best of both worlds, where others may see it as confused. 

Whether you're a city slicker or a suburban mini-van driver, we are going to grow as a region from all indications. And we can no longer afford to sprawl out. We just don't have the resources to build the infrastructure for low density housing. So, intensification or hyperdensity, or whatever you would like to call it, is here to stay. But like suburban sprawl, growing vertical instead out horizontal requires the right kind of planning. 

Move over Boomers, the Echo Boomers Are Flexing Their Muscles

Demographics and real estate have a relationship you can't really ignore. The baby boomers have been given most of the spotlight (or the blame) for how the real estate market has grown. This massive bulge of a population, born after World War II up  to 1964, have been largely responsible for the rise of the suburbs in the 60s and 70s, the revitalization of city neighbourhoods in the 80s and 90s, and some believe, for driving up the cost of housing wherever  and whenever they live.  They are not know to be a thrifty lot. They love to spend and live well.  Some now wonder if this culture-transforming demographic will be responsible for a housing price slump once they retire all at once. It is as if the boomers are the only demographic influencing real estate.

Little focus has been given to another demographic: The boomer's kids, or as some call them, the Echo Boomer. This group born after 1972 to around the early 90s are often characterized as unambitious,  but they are also an influential force growing in power, especially when it comes to real estate in Toronto.

Why you ask? Well, this generation has different habits than their boomer parents. They do not like to commute. More of them prefer to live in the cities near their work, in the thick of the action, and avoid the traffic, which we all know has become a soul-crushing experience since the days when suburbs seemed a little more ideal.  And their numbers are big. They represent half of downtown Toronto (compared to a quarter of the provincial population).  They are a huge reason why so many condos are located downtown. In fact, to feed the housing hunger of these echo boomers, there have been 90,000 condo units built or approved to be built within the city as of the end of 2011, mostly in the core.

So, maybe you are already aware of this. All you have to do is walk around downtown Toronto and see that there are a lot of young people living in the core and living in condos.  Big deal.

But it is a big deal. Not only for residential real estate, but for commercial real estate and businesses looking to set up shop downtown.

In essence, these echo boomers play a big role in Toronto's flourishing business sector where there are a number of commercial businesses moving back or starting up downtown. Back in 1991 when this demographic did not have much sway, downtown Toronto's population growth slowed down to 5 per cent or less over any five-year period where the 905 region reached massive grown at 17 -18%. But since 2006, downtown Toronto's growth has shot up by 16 per cent, surpassing the 905ers who have slipped to 13.7 per cent.

And because of this, for the first time in 20 years, growth in downtown commerical real estate is outstripping growth in the rest of the GTA. Simply put, businesses want to be closer to their echo boomer workforce that prefer to live in the city. 

Sure, we can't ignore that the boomers are going to change how and where we buy real estate in the years to come, but don't count out the echo boomers, who have already showed us just how much they can effect real estate in Toronto.