That sucks

Young Eddie bought an ‘investment’ condo in the Toronto outback a year ago, from plans, for $385,000. He borrowed most of the down payment with a personal loan from the bank in order to meet the 20% requirement. This week, after talking to me – or at least suffering through my lecture – he realized he’ll have a negative cash flow of about $500 a month.

“That sucks,” he said. Now, I replied, you’re beginning to understand. “So,” he brightened, “I’ll sell it – should be able to make some money.” I asked if he has an assignment clause. Nope. So much for that plan. “But when it’s finished next year I’ll dump it and just take the capital gain. They’re already selling for more.” And then I told him any profit will be taxed not at the 50% cap gain rate, but 100% as income. The kid’s now morose. After closing costs and commission, financing charges and debt repayment, plus being hoovered by the CRA on any nominal gain, he’s pooched.

“But I just wanted to start investing,” Eddie whined.

Another greater fool bites the dust.

Over the next couple of years as dozens and dozens of condo towers come online, federal revenue auditors will have a field day. Buying pre-construction condos to speculate on, to flip, to assign or rent out for a few months and dump is considered a business activity. The proceeds are lumped atop your other income and taxed at the marginal rate. It will be a rude surprise for the thousands of lightly-educated amateur players who’ve been sucked into this vortex.

My developer buddies (who’ll still talk to me) say about seven of every 10 high-rise sales these days are completed by people with no intention of living there. This is in sharp contrast to the feeding frenzy for low-rise developments, where speculators are almost non-existent. With over 130 buildings on the go, the GTA has more condos under construction than any other city in North America. There are at least ten developments in the core area that will rise from 50 to more than 70 stories – visible symbols of the hipster fetish for pretending you’re a pigeon. With a bike locker.

In the last three months 7,731 new condos (not counting resales) sold in the GTA, most of them from developers to newbie buyers. That was 26% greater than the same period in 2015, and the second-highest level on record. Meanwhile there were 13,528 unsold units waiting for buyers, according to Urbanation, which sounds like a lot but was the lowest number in six years.

What does this tell us?

Simple. Millennials now outnumber Boomers, and in the urban areas of Toronto or Vancouver, there’s no way many of them can afford to buy a detached house, or any other kind of real estate the industry calls “ground oriented.” With the average hipster now about 27 years old, distrustful of financial markets, suspicious of liquid assets, having known nothing but sub-5% interest rates and growing up in a world steeped in house porn where real estate always goes up, this is what you get. A condo forest.

Says Urbanation dude Shaun Hildebrand, “With demand for condos in the GTA pressing forward strongly, new projects are being challenged to enter the market in greater volume. Should current conditions persist, price pressures for high-rise units can be expected to build, particularly as low-rise housing remains afflicted by record-low supply.”

Of course, it’s way cheaper to rent a condo than to own one, even with 2.4% five-year mortgages in place. Young people borrowing their brains out to buy a condo – whether as an investment or a nest – face rising strata fees, the potential of special assessments in the future, plus property tax bills they cannot control. And with 30,000 new units being added annually to the stock of new boxes in the GTA alone, the odds of a capital gain in the future may not be so hot. Even with a 26% jump in sales, new condo values are barely keeping up with inflation. The increase in the last 12 months was a mere 2%.

The bottom line: this is one tough way to make money. The risks are significant. The rewards sketchy. And owners, like poor Eddie, are subsidizing renters.