COMMENTARY BY JIM PITT
Special to the VOICE
The real estate picture in the Golden Horseshoe is still somewhat foggy. Although the real estate cartel would have you believe that the market is now “balanced,” it rarely defines what that means.
One way of measuring a market is through the sales-to-new-listings ratio. The closer that ratio is to 50% the closer it is to balanced. A high ratio means that we are in a seller’s market, allowing sellers to ask more for their property. A lower ratio means the market is in a buyer’s market. The buyer can demand lower prices and add conditions to the deal.
The largest increases in the ratio are in Ottawa, Montreal and Gatineau. These markets are now in a seller’s market. The largest declines are in Toronto, Hamilton and—wait for it—Niagara. This means that Niagara is now closing in on a buyer’s market.
Out of curiosity I checked the MLS listings for the region for residential properties. As of this writing, there are 1,324 residential properties on the market. Of those, 701 are priced under $500,000, 521 are $500,000 – $999,000 and 87 are priced over $1 million. In the GTA, sales of SFD (Single Detached) homes have dropped 40%- plus for each of the last three months compared to last year. Prices have also dropped by 14% to an average of $785,000 compared to last year in the GTA.
In Niagara, numbers have yet to be published for March, while numbers are readily available elsewhere.
An article in the Toronto Star highlighting the plight of new home buyers acts as a cautionary tale in this new “balanced” market. It seems a number of people purchased new homes in Oakville last year, at the top of the market, from a Mattamy Homes development. They paid between $1 and $1.6 million for these pre-builds. They anticipated selling their existing homes for prices that would more than cover the cost of these new homes. Some of these folks lived in earlier-built homes of the same type in an earlier-built phase of the overall development. Alas, it was not to be.
The homes they are trying to sell are not selling. The price is too high and the new homes are almost ready for possession. What to do?
Well, like a lot of people, these buyer-sellers decided that the government needs to do something, anything, to bail them out of this unfair predicament. So far, all of their e-mails and calls to government ministers and opposition leaders have gone unanswered. They even have a rather expensive looking website dedicated to their plight, full of heart-rending stories and unusual demands. Let’s hope the silence from officialdom stays that way.
The condo market in the GTA is a bright spot in the real estate world. Sales and prices have been climbing steadily and, at times, rapidly. Prices in the GTA are up 27%.
Why? Simple: condos are still affordable when compared to SFD homes. People, especially younger people, believe that a condo is the first rung on the property ladder. You have to start somewhere and, if a 600-square-foot concrete box is all I can afford, then sign me up. Condos are a terrible investment. You are not buying real estate, you’re just buying space. You don’t own any land. You own the unit, but you are responsible for the entire building. Items like elevators, roofs, parking garages, indoor pools, etc., are all very expensive to replace and replace them you will. Floor-to-ceiling windows and glass balcony rails are prone to failure. All of the expenses associated with maintaining the building are part of the monthly management fees.
A new build, all shiny and sexy, will have relatively low monthly fees, but those fees will go up; they never go down, and, on occasion, you may be stuck with a special assessment.
If a major failure occurs and the building must fork out a substantial chunk of cash to cover it, the monthly fees will not be enough. A special fee is added to your cost of ownership. All of the windows might need replacing, or the parking garage floods, or the pool cracks, or the balcony rails fail, or the heating system breaks, or the roof springs a leak. It’s endless and expensive.
New builds soon lose their lustre and become old and tired looking, not sexy, not desirable. The resale price soon reflects this new reality. If the fees are getting too high, the unit is even less desirable. Living in a condo is the same as living in an apartment building; after all, that’s what a condo really is. You have no control over what your neighbours get up to. They can be noisy, crack-snorting, Zumba dancing, Airbnb-renting morons. If you were renting beside them, you would just move.
In a condo, you must sell before you can move. You also have to pay property taxes, insurance and possibly utilities and rent a parking space, or even buy it. Best to rent a condo from some poor fool who bought one.
And how are those poor fools doing anyway.
An unusually high number of articles about the condo market, debt levels and housing correction have been posted in virtually all the usual media outlets over the last week or two.
This is unusual because these are the same sources that were pumping real estate as a good place to get rich. I think they’re trying to tell us something. As it turns out, a substantial number of “investors” have been buying condos in the GTA. Prices rose an average of 26% in 2017. That’s big money.
Condo investors—those who buy, rent out and later sell for profit—bought 48% of the new condos on the market last year. 20% paid in full. These investors are between 40 and 60 years of age, on average. They are either buying as a retirement investment or for their kids. 44% of these investors are in negative cash flow and 34% of them are short, over $1,000 per month, while 20% are down between $500-$1,000 per month. They must make up the difference out of pocket. So what’s the attraction? Negative cash flow for an investment is not good investing.
Well, many people are convinced by real estate salespersons, family, peers and friends that they will get their investment, expenses and a tidy profit when they sell. So far that has worked, but only for the investors who have sold. You have to sell to realize your profits. Meanwhile they keep shovelling their own after-tax-income into their investment. What happens when they do sell, you ask. CRA, the Canada Revenue Agency, has been targeting this particular type of investment lately.
There is a lot of tax revenue to collect from this crowd. If the property you sell is not your primary residence (you don’t live in it), then you owe taxes on the profit you made on the property sale. As an example, if you were making $80,000 from your employment with a 31% marginal tax rate, and you make a profit of $100,000 from the sale of that property, your income is now $180,000 for the year and your tax rate is 48%.
The CRA is not allowing many of these sales to be considered capital gains so there is no tax exemption for you. Some 60,000 more condos are coming to market over the next three years in the GTA. Niagara Region is just starting to jump on the condo bandwagon, late to the dance as usual, but the marketers will be touting these glorified apartments as the investment opportunity of a lifetime, like Nortel, Br-ex, Bitcoin and the rest.
If you want to live in a space, then rent. If you want to own some dirt as well, then save up and buy, but buy only what you can comfortably afford. And, if you own one, never buy a new home until you sell your current home. In this market, to do otherwise is dangerous. ◆