Condo life

How can you blame her? She never bought anything bigger than a couch before. And the guy at the sales office said a lawyer was probably a waste. “Forms are all standard,” he said, “and pre-lawyered. Everybody just signs them.”

So she did. And she got a condo.

Well, sort of a condo. Actually it was a bunch of papers and a brochure. Oh yeah, and a web site. With Flash.

By the time she came in to see me, she’d forked over $60,000 in deposits and owned nothing. What she thought was closing day, wasn’t. In fact when the condo building was erected and she moved in (they told her she had to), she still didn’t own the unit since the place wasn’t registered. It still isn’t. The value of the condo has dropped in the last six months. She wants out, but can’t sell without closing. She can’t close without registration. She spent $60,000 to rent what she thought she owned.

There is a condo reckoning coming in several major cities across the country, but the deep impact will be in Toronto. After years of channeling young and inexperienced buyers into smaller and smaller boxes, more and more expensive, in dodgier and dodgier parts of town, the jig is up. As the flow of new victims turns to a trickle, condo sales collapse and prices tumble, the consequences are clear. Cancelled projects. Thousands of units flooding the rental market. Bewildered young condomaniacs, the unfamiliar taste of financial ruin in their mouths.

For the first time in 16 years, Toronto condo sales in the second quarter of a year were lower than in the first.

Easy to figure out why. New mortgage rules make it a tad harder for first-timers to borrow as much as before. Mortgage rates – the ones that matter (VRMs) – have been inching higher. The cash-sucking HST emerged. Jobs are no easier to find (I advertised for an assistant on Craigslist and received 400 outstanding resumes in 30 hours). And why buy something you can rent for a lot less, when prices are starting to fade?

But this is just the start. Factor in supply and demand, and condo ownership will be as popular a subject among the iPhone set as guys who wear cowboy boots and drive Hummers. With nuts.

Between now and the end of the year, myopic developers will bring another 12,000 condo units to market in Toronto alone. Add to these the 6,000 units that were finished in the last three months, and there’ll be a total supply of 19,000 new condos in this city alone – a huge whack of them within a 10-block radius downtown.

And there’s no end to the tsunami of concrete boxes. Right now almost 275 projects are desperately marketing for buyers, while another 40 or so are expected by the end of the year. This is a classic case of supply and demand getting out of sync, leading to tumbling values.

But there’s more. Best estimates are about 30% of all sales so far this year (and last) were to speculators, who bought pre-construction deals and now face a closing they never wanted. They can’t sell to a new buyer for a quick profit, are forced to cough up the financing, and face the certain prospect of competing for a tenant who probably won’t pay enough rent to cover even condo fees and taxes.

So, rents fall. Condo prices fall. Investors’ equity is erased. Speculators drown.

Remember what I said over the past days about asset deflation? Here’s a living economics lesson, an example of how a marketplace corrects. How booms turn quickly to busts. How leverage can kill ya. How no commodity’s price rises endlessly. How supply and demand, not marketing and desire, dictate values.

And it’s just started. Next year will prove it.

The average downtown Toronto condo sells today for $639 a foot, up close to 15% from last year. It will be inscribed as the high water mark, a moment in time when, like tulip bulbs at ten times the annual wages of a Dutch craftsman, defines delusion and risk.

Meanwhile in Vancouver, condos that dormed Olympic athletes are flogged for $1,078 a foot.

Think Vegas. 2005.