It’s just one month, but a new set of numbers from Toronto builders showing condo prices climbing just 2% on a year-over-year basis could make investors think twice.
The condominium market in the city, the biggest of its kind in North America for that class of housing, is largely based on a capital appreciation. Most investors finance their units knowing that they will be unable to carry them on a cash-flow positive basis based on present rental rates.
“If you are negative cash flow and the thing is not going up in price, you are out of there,” said certified financial planner Ted Rechtshaffen, noting at these rates, the condo owner has more reason to worry.
The 2% rate – a return you could get from an online bank
The 2% rate — a return you could get from an online bank — would be in stark contrast to the 7% to 9% annual increase condo research firm Urbanation Inc. says has been the norm for the last five years.
But the past February to February, the Building Industry and Land Development Association (BILD) says that new condominium purchases across the Greater Toronto Area were an average of $532 per square foot in February, up from $520 per square foot a year earlier.
“I guess what I would say is the 2% reflects two things,” Joe Vaccaro, president of BILD, adding at that price developers have been able to keep condo prices in check. “The reality is units have shrunk in square footage overall; they’ve gone down by 100 square foot over the last five years on average. You are getting a smaller unit, but to remain affordable, they have turned to more innovative designs.”
At the same time as prices gains are slowing, Mr. Vaccaro said rental rates have been “mostly flat” but he says the real test will come when all the towers now under construction hit the market. “We will have to see what impact that has in terms of the rental market,” he says.
So what is an investor to do in these times? The answer is easy. Have it managed professionally by a firm designed to offset these issues by getting more rent for your investment. Stay in the game waiting for your capital appreciation all the while collecting rent and having a positive cash flow on your condo.
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BILD says it’s still early, but so far, high-rise sales for the first two months of the year are down 51.2% compared to a year earlier. The group points out 2011 was a record-breaking year.
The numbers could represent just a short blip because Urbanation says its latest statistics, which were based on the fourth-quarter of 2011, showed prices up 8% from a year earlier. The group says the average sale price was $509 per square foot in the fourth quarter, up from $471 square foot a year earlier.
Ben Myers, vice-president of Urbanation, agrees that many investors in the GTA are not cash-flow positive on those properties, taking the loss because they’ll make money on the underlying condominium.