How do you go about gauging how much speculative investment activity there is in Toronto’s condo market?
If you’re industry observer Urbanation, over a certain period of time you track the number of condos that are purchased on the resale market and then subsequently rented out.
When the Toronto-based firm did exactly that for this year’s second quarter, it found that the number of existing condo units sold and then rented on the Toronto Real Estate Board (TREB)’s multiple-listing-service system surged by 57 per cent compared to the same period in 2016.
In all, 622 units were first purchased — and then rented out — on the MLS system in that three-month timeframe, admittedly a “relatively small” sample size, according to Urbanation.
But those transactions represented an 8.5 per cent share of activity in the segment, up from the 5.2 per cent share observed over the same period last year, according to Urbanation’s exercise.
While Ontario introduced a foreign-homebuyer tax for the Greater Golden Horseshoe, which Toronto is a part of, in the first month of this year’s second quarter, the Urbanation data suggests it didn’t have a significant impact on the condo market.
“Foreign investors, and investors in general, tend to buy new construction condos as opposed to resale units,” Shaun Hildebrand, senior vice president of Urbanation, tells BuzzBuzzNews in an email.
“In the end, there isn’t a large number of foreign investors within the condo market that would be impacted by this tax. Most have or will obtain citizenship, or have family or local intermediaries that can be used to avoid the tax,” he says, noting exemptions and rebates built into the levy.
So why did speculation in the resale market, which Hildebrand notes has less appeal for investors, surge last quarter?
“This data speaks more to the overall investment psychology in the condo market in the second quarter, which shifted somewhat to a more speculative view,” says Hildebrand.
Urbanation points out that investors were taking a loss when they bought units in the second quarter, which is suggestive of speculation.
Prices for existing condo units soared 36 per cent annually on average as of the second quarter, while rents increased by a more muted 12 per ent over the same period, Urbanation says.
“Resale units bought for investment in Q2-2017 were cashflow negative by $238 per month, compared to a net positive monthly cashflow of $46 for investment units bought in Q2-2016,” the Urbanation report reads.
“While the price appreciation required to offset the monthly loss is marginal, the fact that investors would generally be willing to ‘pay out of pocket’ each month on a substantial investment of $104L (using 20% down) speaks to a shift in behaviour towards a strong expectation of short-term capital appreciation,” the report continues.
Another possible cause for speculation could be that units were selling so fast in the pre-construction phase that some investors simply missed purchasing opportunities and had to look elsewhere.
Market absorption rates reached unprecedented levels last quarter. The average condo project hit the 80-per-cent-sold mark in the very same quarter sales were launched, Urbanation says.
“Furthermore, the price points of new launches may have reached a psychological barrier for some investors who sought better perceived value in the resale market,” the report notes.
Either way, Hildebrand does not expect the trend to persist. “I suspect that the price and sales growth data released by TREB in the last few months will cause this share to dip,” he writes.
The benchmark price of a GTA home was down 4.6 per cent from June, according to TREB’s Home Price Index.
“Recognizing that the market has changed and condo prices have flattened, and even declined a little, should lead to less short-term speculation in the market,” says Hildebrand.