We often get asked: "Should I invest in condos?" Years ago, it was a no brainer. Pre-construction condos were sold below market value and by the time they registered (4-5 years later) they would have appreciated for a decent profit if sold immediately.
There are 2 factors to look at when evaluating investment condos:
- Price per square foot relative to the area
- Demographics / Affordability
Price
Nowadays, some projects sell above market value with the hope of the market catching up to the new project pricing by the time the building registers. Buying above market price is speculation. Example: if the neighbourhood is selling at $600 per square foot and the project is selling at $650 per square foot.
What happens if the prices don't appreciate to catch up to pre-construction prices?
What if there is a market correction ?
What if interest rates rise by 1% and the carrying costs are higher after registration? Will the investor be forced to sell quickly to cut their losses?
Due diligence is analyzing the local area to understand what resale condos are selling for versus the pre-construction project .
Demographics / Affordability
Per Toronto Real Estate Board's January 2016 Market Watch report, the average prices in the 416 are:
- Detached homes: $1,061,789
- Semi-Detached homes: $713,972
- Townhomes: $519,732
- Condos: $416,104
There is an affordability challenge in the city of Toronto. Per RBC's Housing Affordability Report, a 2 storey home requires 67.5% of household income, which means if there aren't 2 incomes in the household, affording a 2 storey home is not feasible. A condominium, requires 33.8% of income to cover the costs of the mortgage, property tax and utilities. Once income can afford condos.
As millennials grow older and settle down; move in with their partner, get married or have children, they will outgrow the 1 bedroom & junior 1 bedroom condos they are renting or their mom & dad's basement. Since ground level housing is not affordable, the demand of growing millennials will shift to large 1 + den or 2 bedroom condos.
As the great one, Wayne Gretzky, once said: "I skate to where the puck is going to be, not where it has been" Developers are building numerous 1 bedroom and junior 1 bedroom condos but the puck is going towards the 2 bedroom condos.
Increased demand equates to strong appreciation and higher rental prices. Positioning your investment for future needs is key when building your long term wealth via real estate.
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