SHOCKING TRUTH ON 2019 CONDO MARKETBy CondoWong Wednesday May 8, 2019
In the seminar, you will find the answers to the following questions:
- What makes the 2019 condo market expensive?
- How do we quantify "expensive"?
- What are the main factors driving prices up and down?
- What is the cost of building a condo unit in the City of Toronto, namely Scarborough, North York and Downtown?
- How many condo units were cancelled in the past 24 months?
- What is the key factor to identify trustworthy developers?
- Why do I think Concord King's Landing is a value pick?
2019 CONDO MARKET
If you were to use 1 word to describe the condo market in 2019, what would you use?
I'd say "expensive".
It's been tough to find new condos below $1,000 per square foot.
What do you think?
Crazy Rich Asians?
Super Greedy Developers?
In order to understand the true reasons, you must have the knowledge to quantify the problem so that you can justify surplus, shortage, over-price, under-price rationally. We will start from the root of the problem by looking at supply and demand, then we will break down and calculate the cost of building a condo unit.
Let's take a look at our supply. The graph below shows the number of housing completions (low rise + high rise) year by year since 1990. As you can see, our supply is typically below 40,000 units over the past 20 years. If the news says that the housing supply this year is 80,000 units, you know it's double the normal number. If the news says 20,000, then you know it's half of the normal number. Now you have the knowledge to justify "over" or "under" supply.
What are the factors driving the price up?
- Construction Costs - Labour and material costs are ever increasing. The weak Canadian dollar means that the costs are even higher. As of today, the construction cost ranges from $300 to $500 per square foot, which marks a 40 to 50% increase from 3 to 4 years ago.
- Government Charges - These charges contribute to a big chunk of the cost. For a $500,000 unit, the government charges will contribute to around $110,000 into the cost:
- HST: ~$40,000
- Development Charge: ~$40,000
- Education/Park Levies: ~$30,000
- Land Cost - The government is imposing more and more restrictions on where developers can build. Land owners holding land at a good location is essentially holding onto a piece of gold. They know it is hard to get land, so they don't have any urgency to sell. This trend is reflected by the decreasing number of pre-construction units on the market over the past 3 years:
- 2017 1st Quarter - 6,200 Units
- 2018 1st Quarter - 4,000 Units
- 2019 1st Quarter - 1,827 Units
- Immigration - In 2018, Ontario has 132,000 new immigrants, while British Columbia has 42,000. In the next 3 years, we will be expecting around 1 Million new immigrants to Canada, around half of them will be coming to Ontario. Let me share some population numbers with you so you can quantify the "huge" number of immigrants.
- Canada - 37 Million
- Ontario - 15 Million
- GTA - 6 Million
- City of Toronto - 3 Million
- Local Home Buyers - There are 320,000 first time buyers ready to buy a new home. Do you know how many of the transactions last year in the GTA are contributed by first time home buyers? Around 51%.
What are the factors driving the price down?
- Stress Test - Harder to get mortgages, harder to buy.
- New Government Policies - The government may introduce new policies in an attempt to control housing prices.
NEW INVESTORS' TREND
Typically, more than 80% of my clients would invest in downtown Toronto, without even thinking about anywhere else. But in the past 12 months, I've noticed a new trend. Many people have started looking outside of downtown as the prices in downtown may have gone out of their budget. Why do they still want to invest? They simply don't want to let the money sit in the bank and depreciate. Of course, there are other investment options to consider, such as stocks. But real estate remain the safest form of long-term investment for the majority.
You should set your expectation right with a long-term buy and hold strategy. Don't expect to get rich quickly by flipping. If you haven't done so already, you should watch my Top 3 Secrets in Condo Investing.
So where should you buy outside of downtown? Do you know that only 13% of the condo buildings in the GTA are within 8-minute walk to the subway? Obviously you wouldn't want to be the other 87%, would you? If you've been to my website, you know that I only select projects along the subway line.
THE COST BREAKDOWN
I'm sure you hear so much news about many different condos in the media every single day, so how can you quantify "expensive"? How can you decide if a certain condo is over-priced? It can be under-priced as well, which may then go into cancellation. I've picked 3 places in the City of Toronto, namely Scarborough, North York and downtown, to study the cost of building a unit.
We would break down the cost into the following categories:
- Land - The land cost is around $250 per square foot in Scarborough, $350 per square foot in North York and $450 per square foot in downtown. Of course, land is the most expensive in downtown.
- Construction - Labour, material, currency rates all contribute to the construction cost. You would expect the construction cost to be the same across the board. Why is it more expensive in downtown? This is due to the complication with construction in downtown. For example, developers may need to block off some busy roads for the construction and they may only be able to do so during non-rush hours. All these factors would mean a longer construction time and hence a higher cost.
- Government - As discussed above, government charges will include HST, development charges, education and park levies. These will be around $180 per square foot to the cost.
The basic cost of constructing a condo unit is as follows:
- Scarborough - $730
- North York - $830
- Downtown - $1,030
There are some add-on factors:
- Subway - If the building is within 8 minute walk to the subway, then we need to add $100 per square foot to the cost. This won't apply to Scarborough as there's no subway.
- Quality Finishes - If the building and suite finishes are more high-end, then we would also need to add approximately $100 per square foot. For example, all Miele appliances in a condo unit would cost approximately $25,000, that's $50 per square foot for a 500 square feet unit. This add-on also doesn't apply to Scarborough as the majority of the condos in Scarborough is very basic.
The total cost then becomes:
- Scarborough - $730
- North York - $1,030
- Downtown - $1,230
So now if you see a pre-construction condo in Scarborough priced at $930 per square foot, you can say that's expensive. $810 per square foot? Makes sense. $700? No way.
With these numbers, you are now able to quantify whether a particular new project is priced "right". Instead of just looking at the price, you need to determine if the project has "value".
What happens if the price is not right? That drives project cancellations. The below table lists the 20 projects that were cancelled in the past 24 months. A total of 6589 units were cancelled!
- Justify the Price - Make sure you use the breakdown above to calculate the cost of a certain project. You can then determine if the price makes sense.
- Masterplan Developer - What is a common element among the top developers in Toronto? The all have masterplan developments! They build communities. It takes a lot more to build a whole community rather than a single building. It takes vision, time, patience and money. The following top developers all have masterplan developments:
- Great Gulf
Do you know who is Canada's Largest Community Builder?
The answer is Concord.
MY VALUE PICK - KING'S LANDING NORTH YORK
- 45-acre masterplan development in North York, right by the Bessarion subway station
- Built by Concord, Canada's Largest Community Builder
- Started in 2006, 9 buildings completed, 4 under construction
- 8-acre public park (paid by Concord) is completed and ready to be handed over to the city
- 100-million community centre, with indoor swimming pool, library, running track, day care and more, is now under construction
- King's Landing is in the most central location in the whole masterplan, directly facing onto the park, 1-minute walk to the subway station
- Suite finishes are more luxurious than the 5-star hotels in downtown Toronto
- Amenities include lobby cafe, grand ballroom, high tech conference room, touchless car wash
- All of the above for ~$1,100 per square foot. That's unbeatable value. Think about where else in Toronto can you find all of the above features at $1,100 per square foot?
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