In this article, we are going to discuss pre construction condos Toronto in terms of what we know about pre-construction and what is really happening in the GTA market in Southern Ontario.
To read part 1, click here 《Why Pre Construction Condos Toronto Are Better, Part 1》
Why Pre Construction Condos Toronto Are Better: Reason 5
Inclusionary zoning, on a superficial level, sounds good. It sounds like we’re finding a way to create more affordable housing for people who can’t access the market. Everyone is okay with affordable housing, until the point when you have to sell your property. How will that affect prices?
So, to talk about pre-construction condo prices, which are more expensive than resale prices. That’s going to make the situation worse. So the gap will widen accordingly. And, of course, that doesn’t apply to all buildings that were assessed the previous year. So there are a lot of properties that were owned before, but you’re going to start seeing more and more of them. Builders don’t get any benefits from the city if they offer inclusionary zoning. So the loss of income has to be made up by the pre-construction buyers.
If it’s a saleable condo and not an apartment building, the only way to make up for the loss of income is to charge a higher price for the saleable units. So Candarelle conducted a study of its 908 Sinclair project, which was owned prior to inclusionary zoning. Just to determine how much more we would have to charge per square foot if we had inclusionary zoning in 8% of the building. As a result, they would have had to charge $75 to $100 more per square foot to make the numbers work and get the project started. That’s a 5% to10 % increase in price per square foot for saleable units.
I heard someone on my team say that everyone is an activist by the time they buy a house. I like that because we have a huge wait list of people who need affordable housing in Toronto. The downside is that it makes everything more expensive for everyone else. So pre construction condos Toronto buyers are subsidizing the cost of affordable housing. You might say,that the buyers are rich investors that can afford the extra cost. That’s partially true, but last year I would say that 50% of my business clients were first home buyers. Whether it was downsizing or upsizing in the pre-construction markets. So there are a lot of average income buyers who have to subsidize those costs.
The question is when investors say, I can live with a 25% premium over resale, but I’m not willing to pay a 35% premium on pre-construction condos. So the demand and appetite for pre-construction goes down, fewer building projects are built. Because it is less worthwhile for the builder to construct new building projects. And so eventually there’s a reduction of housing supply because of fewer building projects. So I think that could make things worse in the long run. Studies in Portland on inclusionary zoning have shown that it leads to a decline in new building projects. So I think it looks good on paper. But I don’t think it’s going to work in reality.
Why Pre Construction Condos Toronto Are Better: Reason 6
Is this just a new version of when rent control was put in place in 2017? It will be interesting to see how this plays out. It will also be interesting to see if some buyers refuse to buy in projects that have inclusionary zoning. And I’m curious if this will change the way people buy pre-construction condos. Because if builders have less than 100 units, they don’t have to do any inclusionary zoning. So it will be interesting to see if we have a lot of boutique buildings with 99 units to avoid that. The boutique buildings will be more expensive, of course. But it will be interesting to see if that brings more of that type of condo to Toronto.
Why Pre Construction Condos Toronto Are Better: Reason 7
Currently, many projects require buyers to pay a 20% deposit prior to construction, but this payment is staggered over a period of time. If the numbers are correct and almost 20% of Canadian real estate buyers are investors, will the CMHC(Canada Mortgage and Housing Corporation) increase from 20% to 35% minimum down payment have any impact on the market?
I believe it will have a big impact on pre construction condos Toronto. We have a lot of buyers who have 20%, 25%, maybe 30% ready to invest plus their closing costs. But a lot of the pre construction condos buyers are not people with millions in cash. They’re just refinancing existing properties, taking equity out and reinvesting in the real estate market. So when they have to pay up to 35%, they start to look at their reward risk and say, I’m paying 20% more than the market, I’m waiting five years, there’s a risk of recession. All these risks are associated with pre construction condos Toronto. Now the buyer has 3-to-1（35%）leverage instead of 5-to-1（20%). That massively changes the risk reward. Maybe buyers will invest their money in equities instead of real estate, that in turn may cause a shortage of housing supply due to fewer new condo constructions.
Why Pre Construction Condos Toronto Are Better: Reason 7
Currently, foreign buyers have to pay a 35% deposit if they want to buy a house before construction starts. Would it be fair if we treated local buyers the same as international buyers? If the local deposit structure is increased to 35%, it would mean that fewer local buyers will see pre-construction as a viable option.
Unless buyers sign an affidavit that they are definitely going to move in, then they will only pay 20% of the pre-construction cost. That makes the preference less attractive than resale. But I think if they did that for foreign buyers, the developers would take 35% of the first 15% NRST(Non-Resident Speculation Tax) and they would just increase the deposit for foreign buyers by another 15%.
Why Pre Construction Condos Toronto Are Better: Reason 8
If I’m someone who wants to get into the pre-construction condo market, how long would I have to own that unit to get a good return on my investment? I believe a long-term investment is always better than a short-term investment.
If you buy a condo with the sole intention of selling it, you are entering the market for the wrong reason: because of the tax implications and paying 15-20% above market price will make it difficult to get a quick return on your investment. Also, the transaction costs of real estate in Toronto are so high that you lose all the benefits of real estate when you sell in the short-term investment. You can’t refinance the property, you’re paying all those capital gains or even more at the time of transfer. Unless you’re assuming very optimistic projections of rental costs which in our experience, we build in 3% rent inflation per year however, this is not a guarantee. Very few units in very few projects operate under this assumption. So I think the longer you can hold a property, the better.
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