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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 1, 2018 | The Condo

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Detached houses are in trouble. Condos are hot. It’s a phenom rapidly distorting the real estate market, especially in the troubled towns of Toronto and Vancouver.

For example, in YVR the top end of the market is collapsing (and was even before Comrade Horgan went tax-crazy). In the first three months of 2016, detached sales totaled 2,033. This year it’s just 733. Ouch. Two years ago 64 properties sold for $5 million or more. This year, just 5. In fact there’s now a 9-year supply of luxury houses in the market. Incredible.

Meanwhile condos are being snapped up by newbies and moisters. Many of them, sadly, will regret it. In YVR last month only 13% of the detached homes on the market found buyers. The buy-ratio for condos was 60%. And over the last 12 months, as other types of properties languished, condo prices were pushed up by 27%.

Why?

Simple. That’s all they can afford. The average Van detached is $1.6 million. The average condo is $682,000. So that’s where all the action has been. Recall that the Millennial cohort is huge – bigger than the Boomers. Even though four in ten lack the courage to emerge from their parents’ basements into the harsh light of society, there are enough moisters around to fuel this condo FOMO in both the Lower Mainland and the GTA.

Many believe buying a 550-foot concrete box in the sky is the first rung on a property ladder which will inevitably lead to a single-family home with a driveway and soil. They’re mistaken. For a great many, this experience will end in losses and tears. Condos are a pathetic long-term investment for a myriad of reasons. Let’s review a few of them.

First, you’re not actually buying real estate, just space. No land. No structure. You own your unit from the paint in, however you’re responsible for helping maintain the entire structure. Remember that depreciation of the building begins at about the time construction completes. Elevators, flat roofs and parking garages are incredibly expensive, have a relatively short life span, and are essential.

New buildings are sexy, which is why new buyers want to live there. But they don’t stay desirable for long. Five years later, it’s just another glass tower full of apartments, with fresh buyers attracted to pre-construction sales down the street. If the market softens (and it will) flogging a resale can be hard.

The purchase price of a condo, now huge in Toronto or Van, is just the start of your financial obligation. You face far higher insurance costs as an owner than a renter, plus property taxes. (Toronto’s just went up another 3%.) The biggest worry, however, are condo or strata fees – a monthly levy intended to look after common expenses. Thus can be hundreds to thousands a month. The average is $700-800 for a thousand-foot unit and $550 for a small one-bedder.

You have zero control over these fees since they’re set by a group of rank amateurs who sit on the condo board and struggle to manage a multimillion-dollar enterprise. The fees are almost always lowest when a building is first completed (because stuff has not yet started to wear out or break), then escalate over time. The higher the fees, the more impact on the resale value of your unit. And developers are literally throwing up towers these days, cutting corners on materials and equipment, then shoving off to the next project.

When you buy a condo you’re also accepting liability for the entire edifice. Remember the costs faced by owners of leaky condos in Vancouver? They were on the hook for huge special assessments to fix the damage, had unsaleable units during the entire process, and many of them had to move out. The same will occur in Toronto towers built a few years ago with sub-standard window glass walls. The glazing will have to be replaced, and the occupants displaced – then presented with a bill. Just wait. It’s coming.

You can no longer buy a condo and rent it out for positive cash flow – not with the purchase cost being so high, with increasing mortgage rates, property taxes, insurance and condo/strata fees. These are awful investments. Go get a brain-dead GIC instead.

Of course, living in a condo is just like being a tenant in an apartment – you have exactly the same irritations, but it costs you twice as much. The person above can have friends in for a Zumba class. The guy next door can smoke weed all day with that miserable smell seeping into the scant drywall separating the units. Cooking odours, kids ripping up the hallways, defaced elevators – it’s all part of communal living. But as an owner, you can’t just move out. First you must find a greater fool to take over.

Meanwhile the value of your unit is set largely by the entire building. Comparables are easy for a potential buyer to review. So there’s not a lot you can do to raise the value of your condo. No return for sweat equity. And if the building starts to fade, so does your piece of it, no matter how great you made it look.

Resale value is also affected by supply and demand. In Toronto or Van nobody’s making any more land, so detached houses are in limited supply. There’s a floor to market value. Condos, on the other hand, are essentially unlimited. Buildings in Toronto are reaching 70 and 80-stories into the air, containing hundreds of units. Every parking lot, gas station and golf course is being turned into more high-rise, multi-unit housing. There are over 400 new condos going up in Toronto, and close to 400,000 existing units in that city alone.

Finally, there are only so many people who actually want to live in 500, 600 or 800 square feet in a place with no outside space, limited privacy, rising overhead and no potential for expansion. Once this crop of Mills starts to mate, breed and mature, you can be sure an exodus to the burbs or other affordable places will begin. But who will they be selling their condos to? How will they climb the property ladder without having achieved big equity gains?

Nope, condos are the worst form of real estate to own. The kids being sucked in by the current boom are naïve, gullible and vulnerable – exactly what you’d expect for first-time buyers. They would be far better off renting than owning, reducing risk and saving their precious cash so one day they can stand on an actual patch of dirt, look down, and say, ‘mine.’

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April 1st, 2018

Posted In: The Greater Fool

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