Cranes in the sky, giant pits in the ground. Condos are popping up everywhere, and no parking lot is safe. With most houses in the GTA out of reach, condos have become the new starter home, the downsizer’s destination and a great investment for overseas buyers. But how do you pick? New, old or not yet built? And when’s the right time to invest? We invited an economist, a developer and an agent for lunch and asked them about interest rate hikes (are they coming and what havoc will they wreak), family-sized units (and why we don’t have them), the OMB (a force for good or evil), the Bank of Mom and Dad, Trump, NAFTA, where the smart money is, and lots more.
A developer, an economist and an agent on everything you wanted to know about condos but were afraid to ask
• Shamez Virani, president of CentreCourt, lives in a condo in the Financial District
• Dawn Desjardins, deputy chief economist at RBC, lives in a detached home in Leslieville
• David Fleming, a broker at Bosley Real Estate, lives in a condo in the St. Lawrence Market area
Our focus today is on condos, because for buyers they represent the most opportunity but also the most risk. Right now, pre-construction condos downtown are going for roughly $1,000 per square foot, a historic high. In a word, how would you characterize this current moment?
Desjardins: I’d say “robust.”
Virani: You literally took my word!
Robust is gone!
“This market is out of reach for most people. And there isn’t a lot of supply kicking around, which is fuelling interest and activity”
Virani: Okay. I’ll go with “strong”—in terms of price appreciation and sales volume. In my opinion, both are fuelled by a limited supply.
Desjardins: By “robust,” I’m referring to affordability. This market is out of reach for most people. And I agree with Shamez—there isn’t a lot of supply just kicking around, and that’s fuelling interest and activity.
Fleming: The word I’ll choose is “crazy.” Not crazy bad, necessarily. For some people it’s crazy good. But sometimes it defies logic.
What’s stoking the madness?
Virani: I don’t think it’s madness; I think it’s about Toronto catching up to the rest of the world. In terms of cost per square foot for a downtown apartment, Hong Kong is almost five times the price of Toronto, according to a National Bank of Canada report from December 2017, which puts Toronto 16th among so-called global cities. People are recognizing that value and moving here.
Desjardins: From RBC’s perspective, much of the growth in the condo market is attributable to Ontario’s economy—and Toronto’s economy—which has been outperforming many other provincial economies. Job creation continues to be very high, and our unemployment rate is the lowest since the 1990s, so people have more money. They want to live somewhere, they want to invest, they see the price appreciation. And I agree with Shamez, population growth is a factor, too. In the past few years we’ve noticed that it’s not just immigrants from abroad who are coming to Toronto, but also Canadians migrating from other provinces.
We hear all the time about the so-called Bank of Mom and Dad—parents buying condos for their millennial kids who wouldn’t otherwise be able to break into the market. David, as a broker, are you seeing that happening more and more?
Fleming: Of course. There’s a huge redistribution of wealth from the boomers, who have all the money. You know, my dad was old school. He would say, “I want you to learn what it’s like to live in a basement apartment, eating Kraft Dinner off a hot plate.” But what I’ve heard most parents say is, “Yeah, in theory that would be a great lesson to teach—but I don’t actually want my daughter living in a basement apartment. So I’m going to buy her a condo for $700,000.”
These parents are presumably borrowing against their own homes to finance the purchase. Dawn, as an economist, does that stress you out?
Desjardins: In terms of debt, it’s of concern on the aggregate level. But we do see that mortgage debt service costs are manageable, even though we know the stock of debt is rising and the amount of debt has increased—because, of course, interest rates are very low. We think that employment gains will continue and that wages will grow, too. But income growth, most likely, is not going to keep up with the increase in the cost to service all that debt.
In other words, the risks aren’t so severe right now that you’re backing off condos.
Desjardins: Right. Our macro view remains that Canada is going to have another year of solid growth.
As RBC’s deputy chief economist, you monitor a wide array of market indicators, watching for signs of instability. What keeps you up at night?
Desjardins: Anything that impinges on trade. We’re a small, open economy. Trade is very important. I also worry about things that could be upsetting from a global perspective, that would roil financial markets. Once you get into a situation where stock markets tumble—even if we just get into a trade war—I think that would have negative implications for the global economy.
The median household income in Toronto is $78,000, and the average price of a condo is upwards of half a million. Should average Torontonians be buying into the condo market right now?
Desjardins: Well, if they have a job. I wouldn’t say that we’re not concerned about unemployment. If you saw a significant jolt to the labour market, whether it’s another Trump tantrum or something else, that could certainly cause disruptions in the economy. Or, if we saw interest rates move aggressively and sharply higher. But we don’t see these risks as likely to materialize for the local economy.
How prepared are downtown condo owners for even a moderate interest rate hike?
Desjardins: We think that rates are going to move up, and we think that income is going to move up. I mean, the reason rates are going up is because the economy is doing well. As those rates tick up even more, I think you will see discretionary spending curtailed.
David, did the new, tighter mortgage rules that came into effect in January 2018 have anything to do with the surge in condo prices in February 2018—by pushing some buyers away from houses and toward condos?
Fleming: I’m not sure that change had anything to do with it, but I am seeing more people in general who are looking at how expensive houses are and saying, “Okay, I get it. This is the reality,” and they’re opting for a condo instead. At some point, people adjust their expectations, and that’s happening right now. There are couples who are having kids in condos, and some will stay there forever. It’s a sad realization, but it’s an intelligent one.
“I believe this is the last generation that will be able to afford downtown real estate. The rich will own, and everyone else will rent”
So what’s your message to the thousands of young people desperate to own four unshared walls? Tough luck?
Fleming: Look, I believe that this is the last generation that will be able to afford real estate. I believe that 30 years from now, in the downtown core, the vast majority of people will rent, and that’s just going to be the reality. I think that rich people will own homes; I think that investors and institutions will own property. It will be extremely difficult for a 27-year-old couple to afford a detached house. I find that a lot of the younger people today are unwilling to accept that reality.
Shamez, do you agree? Will there ever be a chance for young people to enter the market again?
Virani: I think there is a window, and it’s still open right now. There are opportunities to buy units that are “practically” affordable. I believe, like David is saying, that the young people who will get into those units today will, 10 years from now, say it was the best decision they ever made.
Fleming: I’m 37 years old and I’m still in a condo downtown, and I love it for the lifestyle. We had a baby in the condo; we’re happy as hell. It’s walkable, we can push a stroller around in the area, and everything’s at our fingertips. You don’t need to have a house to have a child anymore.
Okay, but what sort of square footage is your condo?
Fleming: I’d rather not say.
Let’s attach some numbers here for perspective. A three-bedroom condo, downtown, right now, costs $1.3 million. Who’s buying that?
Fleming: Yes, but a three-bedroom condo is an idea. It’s not a real thing. The city forces developers to include three-bedroom units, but doesn’t stipulate the size or price. So developers reply, “Okay, no problem. I’ll give you three-bedroom condos”—and they build these tiny 800-square-foot so-called “three-bedroom” condos. A family’s not going to live in that! An investor will buy it and stuff three young people in there, who will pay $1,200 per bedroom, and it’s going to be a great yield.
Shamez, you’re the developer. Is what David is saying true?
Virani: Look, if there were a market for real family-sized units, we would put them out there. The challenge we have as developers is that the banks require us, in order to finance construction, to pre-sell to a certain level. I don’t know many young people who are going to put down a deposit on a three-bedroom they won’t be able to live in for five years. Because they just don’t have the means to do it, plus it’s difficult to plan that far ahead—they often don’t know how many kids they’re going to have.
So the demand for three-bedroom family condos does exist, just not early enough in the process for developers?
Virani: Absolutely. Frankly, that demand should be met by the rental market. And until recently, it was.
Right. Last April, the province expanded rent control to limit annual increases on all rental buildings, regardless of their age. Were those measures a mistake?
Fleming: Yes, and I think most economists would have said it would have an adverse effect on affordability. Look at an individual condo landlord: his property taxes go up maybe six per cent a year, his condo fees go up 12 per cent, and his hydro fees go up 10 per cent—all of this is hypothetical. Suddenly his expenses have gone up five times what his allowable rent increase is. In the past, he might say, “Okay, I’ll take it on the chin because I know once that tenant leaves, I can set the rent at whatever I want.” He can’t do that anymore.
Virani: And as a result, you’re seeing some rental developers switch their projects to condos because they can’t find a financial model that makes sense. Others have chopped large units into smaller units because they want to encourage turnover: bachelors and one-bedrooms tend to turn over at a greater rate than two-bedrooms and three-bedrooms.
You all seem to agree that affordability is first and foremost a problem of limited supply. So what’s the solution?
Virani: It would help if there were fewer impediments to development. It has never been more challenging to develop in the city than right now. You can look around and you can see that the number of surface spots has dwindled to nothing. The low-hanging fruit is gone. On top of that, we have had massive regulatory change with the abolishment of the OMB. The talk is that the level of approved density is going to go way down, meaning fewer residential units.
Under the old system, developers would submit their variance applications at the city level. If they didn’t get the result they wanted, they’d appeal to the OMB.
Virani: Right. And that system resulted in a lot of development. Whether you liked the specific development is subjective, but the result was a lot more supply.
The Greenbelt, which is a band of protected land surrounding the GTA, was designed to limit urban sprawl, promote density and help the environment. Should it be opened up for development to help increase supply?
Fleming: I don’t want to tear down the rainforest, so to speak, but at the same time, when we run out of space down here, something’s got to give. Opening up 10 per cent seems reasonable.
Virani: I disagree. I think the Greenbelt is the best piece of legislation in the province. I’m a big believer in density, and the way you create density is you have to create that artificial island, and that is the best policy for making our city competitive. I look at the quality of life in Toronto and I love that. And that doesn’t happen unless you have the Greenbelt. If we didn’t have the Greenbelt, we’d be like Calgary, where there is no downtown. For the first time ever here, we’re seeing a huge amount of high-rise development in the 905. If we didn’t have the Greenbelt, that would all be low-rise houses. So the Greenbelt is also helping to ensure that we’re building up, not out.
Fleming: The cynical side of me says people want what they want. There are people out there with the American dream of the house with the white picket fence and the walk-in closet. Will we ever see a member of government stand up and openly admit that people need to find a new dream? The new Canadian dream is what—a great view and really, really thick granite countertops?
Shamez, how hard is it to get a development project greenlit at city hall?
Virani: It is the most complicated and difficult thing that I’ve ever done in my life. Granted, I don’t have kids.
Fleming: You just wait!
Virani: When I started seven years ago in the Toronto market, we would typically say if we’re buying an unzoned site, it would take us about 12 to 18 months to get zoning. Today we’re underwriting for 36 months. Also, we’re developing in more complex locations. Surface parking lots are easy, but try doing it in a mid-block site stuck between two existing heritage buildings. There is a huge backlog of approvals sitting in the municipalities across the GTA that could be developed if the approvals were granted. But the approvals take so long.
Why does it take so long?
Virani: I think there is a staffing issue. There’s also a general disdain for development at city hall. In fairness to those councillors, it is really tough to maintain services and infrastructure to support the level of development we’re having in the city—but that’s a cost of being the most attractive place in the world to be.
Fleming: It’s not just the politicians. Citizens are often anti-development, too. Some people who have been here a long time, they think of Toronto as this cute little town and they’re averse to growth. They think that Toronto’s big enough—let’s just leave it as it is.
Waterfront Toronto has signed an agreement with the Google sister company Sidewalk Labs, which wants to build a community on Toronto’s waterfront in ways that would probably require exemptions from most standard zoning and construction regulations. Shamez, as a developer who must follow all the rules and regulations, what do you make of that?
Virani: On one hand, that Sidewalk Labs has chosen the Toronto waterfront as a place where they want to think about the city of the future? I love it. And yet, I don’t think that there should be one set of rules for one plot of land and a different set of rules for another just because there might be some knowledge derived from it. I think the city needs to be careful there.
For people buying right now, give me two areas of the city that you would recommend they buy a condo in.
Fleming: I would stay where I am. I’ve been in the St. Lawrence Market area for 12 years. To me it’s a vibrant area but with a different vibe than, say, King West. It’s a little quieter, and it’s a good hub for me to do what I need to do. If you’re looking for a value-driven purchase, you’ve got to push to an area like Regent Park. I’ve been putting people there for the last three or four years, and the value is unbelievable. You’ve got commerce—the base of every condo building is either a Shoppers, a Sobeys, a Subway or a bank. And how far are you from Yonge Street? The same distance you’d be if you were living on King West, but at a fraction of the price.
“Jarvis, Church and Sherbourne south of Dundas—I think those are going to be the next great neighbourhoods”
Virani: I’d pick two areas. I’d say downtown east—basically Moss Park. That neighbourhood will be cool in our lifetime. If you look at the last 10 years, people who bought in King West early on did the best of anybody in the city, and it used to be a bit rough. Jarvis, Church, Sherbourne, those sorts of areas—I think they’re going to turn into the next great neighbourhoods of the city. I’d also recommend places where there are new subway stops, like Vaughan Metropolitan Centre. There are some affordable condos that you can buy there that will appreciate relatively faster than the rest of the market.
Desjardins: Leslieville. That’s where I’ve lived for a long time. It works for me.
We’re headed into a provincial election. What’s one piece of advice that you’d give to our next premier about the condo market?
Virani: Lack of supply is the problem. Don’t focus on demand.
Fleming: I’ve come to realize that politics, for the most part, is not about governing the populace; it’s about staying in power. So I would say, make decisions that aren’t just about getting votes. Try to look at what we’ll need in 20 years, not in three or four months.