A tale of two cities: The condo version

Vice President , The Regional Group of Companies Inc
  • Aug. 27, 2014

John Clark“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the . . .”

Well, you get the idea. Being the social critic that he was, I wonder what Dickens would have said about Canada’s condo market.

Ottawa has gone soft

Last week, I got a call from a real estate agent who wanted to pick my brain about condo land values in Ottawa. It’s a fair question, considering the state of condo sales so far in 2014.

Last month, the Ottawa Real Estate Board reported that condo sales on the year to date were down 6.5 per cent from the year before, while average selling prices have slipped 1.2 per cent. This is noticeably weaker than the level of activity recorded in the single, semi-detached and freehold segments of the residential market, which are up by an average of two per cent.

Ottawa’s condo market has gone soft. While there are many projects at various planning stages, only the brave and well-heeled may be in the land market right now. It’s a “hunker down and wait it out” environment for developers. For most, the best option is to carry on with what’s already in the planning stages, to be ready to turn sod when the market returns.

What’s important to understand about Ottawa is that its market continues to be driven, to a large extent, by federal employment, and that the condo market still represents a fairly small segment of the residential market. We’re still seeing a substantial number of housing starts across the city, though this is down from a few years ago.

There is demand for condos in Ottawa, but new supply has to match demand. In any new growth market, excessive exuberance often strikes at the outset; rival developers seek to be the first to raise their shiny new towers and cash in while the opportunity is hot.

But this ultimately leads to a glut of supply. It takes some time for the fundamentals of supply and demand to calm the buzz of activity to a more sustainable level.

Toronto is still pumped up, though

Now, contrast this with Toronto, where another 70,000 condo units are expected to come online this year and next, twice the historic average.

According to TD Bank, so many new condos continue to be built in Toronto that sales prices on new units are cannibalizing old ones. The average price of a new condo is $545,000, versus $347,000 for existing units, despite the fact the average size of a condo built a decade ago is about 925 square feet, versus 798 square feet today.

Toronto does differ from Ottawa in that its awful traffic congestion encourages people to live closer to work when possible. There are also many major downtown employers in the finance and consulting industries in Toronto. Complain as we may in Ottawa about traffic (especially with this crazy construction season), it’s still nowhere near the hassle that it is in Toronto.

But, I can’t help but wonder if there may be another variable at play that is driving the Toronto condo market, at least in part.

Beware zombies and their ilk

In July, I wrote about “the rise of the zombie horde.”

The zombies in question are properties that sit vacant, owned by investors who are looking for real estate opportunities beyond their native borders as safe havens in which to park some of their cash. Many of these foreign investors are not interested in actually occupying these offshore investment properties, or even in having the properties generate income.

I’ve spoken with colleagues who have seen this happening in Vancouver’s market, where Asian investors purchase towers, but have no desire to sell or lease units. A perfectly good building, perhaps even, a perfectly good brand-new building, sits unused. This ultimately distorts the local market and can set the stage for a market crash.

Has the zombie horde spread to Toronto? Does this help explain the continued boom of its condo market?

Time will tell. But when assessing opportunities in any market across Canada, it behooves you to take a close look at the fundamentals of supply and demand, and be certain zombies and other portfolio horrors are not giving you a distorted view of reality.

To discuss this or any other valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am also interested in your feedback and suggestions for future articles.


John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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