2012 Resolutions - Buy, Sell, or Hold

2012 will present some challenges for those investing in condos. Timing the market has never been easy. Personally, I am not comfortable with condos as an investment. However, many of my colleagues and clients have made considerable profit investing in condos over the years. When I look at an investment, I prefer to see a profit or return on my initial cash outlay. On a yearly basis, the net income from condos does not yield a high return. If interest rates were higher, some of these condos would even lose money. The greatest return on condos has come from capital appreciation. The Toronto market continues to support increasing prices year over year. Can this continue?

New condo developments in downtown Toronto are coming out with prices starting at $700/sq. ft., which does not necessarily include parking or lockers that can add another thirty to fifty thousand ($30-50K) to the price. When I started practicing real estate in 1991, condos in nice neighbourhoods could have been purchased for slightly over $100/sq. ft. So what are the forces driving prices upward?

According to economic theory, price is a function of supply and demand. From the demand side, Toronto, as well as Canada, has been experiencing an influx in immigration. In 2010, there were about 280,000 immigrants to Canada, compared to 250,000 in 2006.
(Citizenship and Immigration Canada). About 92,000 of 2010 immigration came to the Greater Toronto Area (GTA). If you assume that for every two new immigrants, you require one residential unit, the demand from new immigrants would require about 46,000 additional residential units in the GTA. From 2006 to 2010, the number of housing starts in Toronto ranged between 26,000 to 37,000 units per year, while housing starts for the rest of the province ranged from 22,000 to 31,000 units per year, as shown below.

Source: Statistics Canada

However, the number of immigrants coming to Toronto has been on a decline since 2001, yet has shown a 12% increase from 2009 to 2010.(Citizenship and Immigration Canada). Nevertheless, unless the number of new housing starts per year, including new apartments, grows considerably, the demand from immigration alone will continue to exceed the new supply of housing.

Another factor affecting demand is the mortgage interest rate. The lower the interest rate, the more affordable housing becomes. However, I expect prices in the Toronto market to continue to increase until the cost of carrying debt on housing becomes too great a percentage of disposable income.

I have also noticed that the size of starter homes and condominiums has been getting smaller over the years, as the price per square foot of the properties condtinue to increase, especially in the more desirable areas of Toronto. The question becomes how small a property people are willing to live in before they stop buying.

As an investor, I would focus on the smaller units, as these will be easier to resell, or to cover the carrying costs as rental income units. To play it safe and maximize my returns, I would resell the units as soon as possible after occupancy or registration, depending on what is allowed in your agreement with the builder from whom the property has been purchased.