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Price cuts spark a flare-up in the Toronto condo market

Taken from the Globe and Mail,

In an astonishing turnaround, the Greater Toronto Area's new condo market shot from moribund to near record-breaking in September. In August only 861 suites changed hands, while in September that number rocketed to 1,658.

Indeed the number is probably about 400 units higher, says George Carras, president of RealNet Canada Inc., which tracks the new condo homes market. Those suites, however, were sold toward the end of the month and RealNet has to wait until the 10-day rescission period is over to count them as sales.

Even the flagging detached new homes market enjoyed a small up-tick, rising to 1,064 sales from August's 936. So what happened? Experts like Mr. Carras suggests two things: A near record level of new project launches (14 and the second highest in a month on record) and the CIA.

No, not that CIA. CIA is what people like Mr. Carras call condo investment advisers. They are a new breed of real estate agents and brokers who have on-hand a healthy roster of investors both domestic and foreign. That's who snapped up new condos at a frantic pace in September, a pace that seems likely to have continued through October as well.

Insiders suggest that, in some areas, investors accounted for up to 60 per cent of sales in those newly launched projects and with about 4,000 new suites coming to market, the impact was indeed profound. Downtown West, the entertainment district, for example, saw 611 sales in September while Mississauga City Centre saw 177 and Highway 7 and Yonge 148.

So what drove investors to open chequebooks and plunge back into the market? The chief factor – aside from a smorgasbord of choice in high density, much sought after neighbourhoods – was price. Believe it or not, the index price for condos actually dropped $14,608 in September from August to stand at $410,730. Bit of smoke and mirrors really. Average price per square foot stayed nearly constant at around $493. The price drop came from builders creating smaller suites – about 831 square feet or 10 per cent smaller than August.

“Those CIAs had been advising their clients to hold off until the fall and all the new launches,” says Mr. Carras. “They are really on top of things and knew builders would be redesigning projects to make suites smaller and therefore more affordable.

“Those guys know exactly what their clients are looking for, what they like, and can match new projects almost perfectly to what clients prefer to invest in.”

The CIA and brokers and agents in general have become a vital part of the new condo business, says Barry Lyon of N. Barry Lyon Consulting Ltd. In the ‘good old days' builders generally relied on their own staff sitting in presentation centres as their primary sales force.

“Then if you sold 30 per cent of suites during a launch period you were doing well,” Mr. Lyon says.

In today's market, however, the success of a project is heavily dependent on risk management and a large chunk of risk management is the speed with which a builder can sell enough units to reach the level of sales demanded by the institutions which provide construction financing.

“Today you shoot for 60 per cent of sales during the launch period,” says Mr. Lyon. “Speed is a determining factor today.”

Which is where the CIA comes in. Brokers and agents with lists of investors in their pocket are courted and treated to advance previews well before the public gets a look at projects. Generally what they want are one bedroom and one plus den suites in buildings on or near high speed transit lines and in sought-after rental areas. Price is crucial. Investors want suites where rents cover all or almost all of mortgage and monthly maintenance costs.

That $14,608 drop in the price index in September gave them what they needed as did new launches in areas like downtown west and a new series of buildings on Etobicoke's Lakeshore motel strip, the last available area of waterfront in the city.

While end users, the men and women looking for a place to call home, continue to play an important role in the condo industry, for this fall they will take a back seat to the CIA.

There is a positive benefit to all this investment activity. Since the mid 1980s, new condos have provided the GTA with about 98 per cent of its rental stock. As condo prices rose, the future stock of rental suites became endangered. This fall's blip means thousands more will come onto the market in 2012 and 2013. What they will rent for, however, is anyone's guess right now.