Toronto Income Property Newsletter: October 2008

So where are all the deals?

After this past week of financial turmoil in the U.S., many of the experts are warning us that we are in for a rough ride in real estate. The cover of Macleans this week features the headline: “Canada’s Looming Real Estate Crisis” and shows a house that’s about to fall through a floor. The highlights of the article are that the west is suffering a much greater decline than Central Canada (a 9% decrease in prices) and that our market may be in for a similar drop. The argument is basically that since interest rates are still low, inflation has been kept in check and the trouble in the economy will lead to reduced incomes going forward, that house prices will have to fall. If the housing market is a barometer for the economy in general, then certainly the numbers will have to reflect this. The Toronto housing market can’t keep soaring up while the rest on the world is in recession, right?

It’s going to be interesting to see the September MLS numbers for the GTA since there is definitely a sense amongst realtors that the market has finally slowed down. Every day agents are asking me if I’m busy – which means by and large they are not. Midway through the month, TREB was reporting a 16% decrease in the number trades from last year and about a 6% drop from the year before. Since last year was yet another record-breaking year no one expected it to continue forever, but many suspected that once the market started to cool that prices would start falling. I can honestly say that hasn’t happened yet. While the number of trades are less, the average prices haven’t dropped that much as of yet.

Many argue that since we didn’t face the same sub prime mess as in the U.S. that we will not face the same devastation in our housing market. Also, interest rates are likely to stay low for the foreseeable future which will still make it fairly attractive to buy under the right circumstances. Thirdly, the construction hasn’t tanked yet, and this industry is very much tied to the housing sector. I received a 25% off flyer from Home Depot yesterday so maybe we are just around the corner.

My opinion is that there is going to be a “cooling off” period where Sellers will have to adjust their expectations. This ought to stem from real estate agents educating their clients to the realities of the market we are entering into. No market crashes overnight and often the transition from a sellers’ to a buyers’ market often takes several months. I have said in my previous newsletters that I’m not so sure we are even entering into a buyers’ market. I would call it a more “balanced market” where prices should reflect stronger returns, but there won’t be any properties to “steal”. It’s going to take some time to get used to this new market. I think that people that have to sell will need to look at their pricing strategy very carefully and that most people will simply wait.

There are many of you reading this right now that have gone to look at properties with me over these past two years and the majority of you have not bought anything. Unless you are living in a triplex in a great location I likely would a have steered you away from buying. Since income properties are supposed to make sense on the numbers the era a four and five caps will have to come to an end. I have been anxiously waiting for this turn in the market so that bottom line investments start to make sense again. I have been talking to many of my clients about getting ready to enter into the market again since I expect returns to get better and the spreads for renovators to widen.

But it’s not happening yet. Prices are still too high.

If I look at the twelve published sales of triplexes in the central districts for September, you will see that the sale prices were 97% of list. No one got over asking price, which is a first in some time, but this still shows us the people are paying what Sellers want. If I now look at the bottom lines on these properties, we are still dealing with returns of less than 7%. So we need to see more downward movement to get excited about buying again. I will look at sales again at the end of this month and see if we are still observing the same patterns.

If you are keeping an eye on the Toronto market and waiting to see if the time is right to get in, I would watch the condo market. I think that if the market really drops significantly then we will see it first in this market. There’s a large stock of unsold condominiums on the market, and there are 120,000 new condos are projected to come on the market in the next couple of years. Not only are unsold and proposed condos raising eyebrows, it is believed by local market analysts that at least 20% of condos sold in recent years have been purchased by investors seeking speculative gains as opposed to those living in them which casts substantial doubt on the true underlying strength of sales numbers.

Your condo agents will try and spin it but think about it logically. If the market turns really bad, what will go first? Would you bet on a chunk of space in the air that was built in about two months or a property that actually generates money that you don’t need an elevator to get to? Hopefully, the condo market will be spared any bloodshed and will continue to thrive.

It’s going to be an interesting ride as we get into this last fiscal quarter. I don’t think that the sky will fall too dramatically but you may want top keep an umbrella handy just in case. You will be hearing from me as more houses start to make bottom-line sense again. Selfishly speaking, I can’t wait because I’m quite ready to get many of you investors back into the market again … finally.

Take care everyone. Enjoy the crisp fall weather and to all of you with kids, have a Happy Halloween.

P.A.