The Other Side of the Story XI – At What Price Should You Buy a New Condominium?
From the desk of Ben Myers, SVP Market Research and Analytics
This is the eleventh instalment of our “Other Side of the Story” series, where we have provided an alternative view on newspaper articles pertaining to the Canadian housing market. Our intent hasn’t been to demean the journalist or the publication, but to simply provide a further perspective on the results for Fortress, our partners and investors in the Fortress Real Capital product.
In each of the first 10 blog posts in this series I have vehemently disagreed with something that appeared in the article, post or book. This time around, I didn’t disagree with the points made in the article, but there is still another side of the story. The article appeared in the New Condo Guide a couple weeks back, you can read it here: Page 1 & Page 2 by veteran real estate super broker Andrew LaFleur. I know Andrew and am a big fan of his work, however, he is looking at the purchase of a new condominium solely as an investment purchase. Many end-users think too much about the condominium as an investment, and less about the place they want to live. Everyone would like to make money when they sell their home or condo, but being happy and comfortable in the condo you end up purchasing should also be a top priority.
Andrew’s first point is “always buy a pre-construction project below market value”. If you read Andrew’s rational, it makes perfect sense as an investment strategy to hedge against a potential market correction, and immediately create equity in your investment. Unfortunately, if you are an end-user looking at a specific neighbourhood, you might not be able to find a new suite that is priced ‘below market value’. There are several reasons you might purchase a new condominium at a price above market value. First and foremost, would you pay the same amount for a 2009 Honda Civic as you would a 2014 Honda Civic? Probably not, a unit that has never been lived in is more valuable than one that has not, all things being equal; you have a wider choice of suite layouts, a wide choice of interior finishes (and often the latest and greatest), you can pick your floor, you can make minor adjustments to the floorplan, and most importantly you have a warranty on your suite from both the developer and the Tarion New Home Warranty program.
When you are buying a new condominium, you are essentially buying a new condominium “future”, meaning you are paying (a down payment) for the right to buy this condominium unit in two to three years, and ultimately you need to be confident that in two to three years when you close and move-in to your suite, that you paid the at- or below-market rate, be it 2016 or 2017. So if you pay 5% above market for a unit today, and you think the market will increase by 10% on average by 2017, you come out ahead. Don’t forget that if the new condominium market declines in the future, it is likely that the resale market will be adversely affected as well, so you likely won’t be better off buying an existing unit that may feature dated finishes, no warranty, or perhaps higher monthly maintenance fees. What are the chances the prices of new condominiums are lower in three years than they are today? Well, according to data from Urbanation Inc, the last time prices were higher three years prior in the new condominium apartment market in the Toronto CMA was 1997.
We recently launched The Harlowe by Lamb Development Corporation to our Fortress VIP investors at just under $600 psf, a fantastic project at Richmond and Bathurst. Looking at recently completed resale condominiums in the area (registered since 2010), they have been trading at about $560 psf in the secondary market. You would be hard pressed to find a new unit under $560 psf that has such a great location close to the trendy and fashion-forward Queen and Bathurst neighbourhood, which is also located within walking distance of the great restaurants and nightlife of the King West neighbourhood, that features a very high level of standard interior finish that are the signature of Lamb Development Corporation.
We have three projects with Mady Developments that will be well above market pricing, Brookdale on Avenue Road in Toronto, Bridgewater Residences in Burlington and SkyCity Centre in Winnipeg. None of these projects and areas have ample resale comparables, making it difficult to determine a fair market value for them. All will be tremendous projects, and all will sell above market!
In conclusion, the strategy for an investor that wants to hold and rent a unit will be immensely different than someone looking to live in the unit themselves, and with this post I wanted to make people aware that those strategies should be quite dissimilar. Sometimes the location, developer, finishes, choice, warranty or lack of direct comparables makes paying ‘above market’ the right choice for you. So despite a well written and well-reasoned article by Mr. LaFleur, there is also another side of the story.