Days ago I ripped Brad J. Lamb, Rolls-driving roi-des-condos, over questionable marketing for a new condo project. In Calgary of all places. Buy a unit here, it seduced investors, and make 282%. Plus a pony.
In doing so, I erred. Forgive me. My post left the unfortunate impression this was an isolated instance, therefore worthy of coverage. Nothing could be further from the truth. When it comes to flogging those little concrete boxes to investors (because end users are leaving in droves), it’s the industry norm. In fact, murdering truth has been taken to an art form by generously unethical real estate agents who hook buyers on developers’ behalf.
This seems typical of the unregulated solicitations invading email boxes lately, from a Re/Max office in Mississauga. It’s this kind of logic that’s led to a never-seen-before event in Canadian real estate – fully 80% of all condo sales in the GTA (running at 2,000 a month) are going not to people planning on living there, but to investors.
What’s the logic, when it’s impossible (given current prices, condo fees, taxes and closing costs) to rent a condo for enough to carry it? One word: speculation. This is dot-com all over again. It’s Nortel. It’s silver. It’s greed. It’s buying high, expecting higher. And we know how that ends.
Look at the pitch: borrow $70,000 to buy a $350,000 condo which won’t be built for five years. Make interest-only payments, so after 60 months you’ve shelled out $11,000. But by then the condo is worth $100,000 more, since “downtown condos historically have been appreciating at approximately $20,000+ annually.” Piece of cake. Spend eleven grand, make a hundred. Guaranteed.
The odds of this happening are zero, or similar to F inviting me to share his hot tub. In five years the condo market, especially in the GTA, will be a smoking hole, leveled by excessive supply, rising interest rates, fat property taxes, shoddy construction and a real estate meltdown. This is the most at-risk segment of the entire housing landscape, and runaway speculation will play a major role in its demise.
Counting on a 6% annual gain in the price of an unbuilt unit while real estate cools, mortgage regs are tightened and the banks spanked by the feds for excessive lending, is fantasy. Like telling a stock investor that because the S&P 500 is up 11% for far in 2012, it will be ahead 33% by Christmas. And 160% in five years. Guaranteed. BTW, that’s illegal – and for good reason.
But let’s assume some poor schmuck from Mississauga believes this crap. He borrows $70,000 against his $400,000 townhouse near Square One and buys a pre-construction condo in one of the 148 towers now being constructed around Toronto. One of four things may happen. (a) He spends $11,000 on interest and makes a hundred grand, just like Re/Max says, by flipping the unit upon closing in 2017. He sets my house on fire and kidnaps the Amazons in celebration. (b) The market tanks and the condo’s never built. He gets his deposit back after paying a bunch of unrecoverable interest. (c) The building goes up but the market softens. The condo is now worth less than he paid, for an instant loss upon closing. (d) The condo is finished, retains its value, and the investor closes the sale.
The most likely of these? No building goes up. But let’s assume it’s built, and the unit retains its $350,000 value. Then the specker has to close, pay $7,000 in land transfer tax, and take on a $287,000 mortgage. By then a mortgage will be at least 5%, putting the monthly at $1,600. Add average Toronto property tax and condo fees, and the carrying cost will be $2,500. But you also have to factor in the $70,000 borrowed downpayment, for another $200 a month, or a total of $2,700. (I’ll be kind and won’t add the lost $400 a month that could be earned in the downpayment had been invested in liquid assets instead.)
So now schmuck has a $2,700 monthly nut, a one-bedroom condo which rents for about $1,700, and a $12,000 annual loss. That’s a 17% yearly haircut on the $70,000 invested.
So why wouldn’t the vic just bail, sell the condo and get his down back? Because soon there’ll be no market, as condos go illiquid. Happening now, actually. Take a look at how many resales there are on realtor.ca, and how long they sit in agonizing turpitude. The greater fool gene pool is running dry.
So, it might not be interest rates or new mortgage rules. Maybe not the economic mayhem of socialists in France or skinheads in Greece. Or even unsustainable levels of household debt and $1.50 gas. Maybe the real estate market’s final detonator will be the gullible innocent in suburbia pushed into a leveraged and greed-fueled frenzy by his friend, the Re/Max agent.
At least one thing’s certain. We never learn.