Tuesday, May 22, 2012

NIMBYs and the OMB, who's right?

NIMBYs (or Not In My Backyard) and the Ontario Municipal Board (OMB) are often topics of media attention and we are witness to the fights that take place in each of the communities in Toronto.

"Just build to the current zoning" says an angry resident. Or if the zoning is the opposite of the result you seek "1960s planning is bad planning". We are often amused by the banter on either side.

The recent firestorm created by an application for a 6-storey condominium apartment in "The Beach" recently got us thinking once again!

Contentious issues with the application were that it stepped back at the 4th storey instead of the 3rd, that it was 6-storeys (bringing shadows down on neighbouring properties), that the modern architecture was out of place in the 'village' context of The Beach, that traffic would be congested, that the area is a family neighbourhood and the introduction of young singles would interrupt that, among several other complaints.

Now some of these complaints were valid and some were not. Our thoughts: there are already 6-storey buildings in The Beach. In terms of shadows - is the expectation when you buy a home that the neighbourhood will never change? In addition, only 25 resident parking spaces will be added, and according to my discussions with the developer, the majority of purchasers were move-down empty-nesters from the area, many retired - doesn't sound like a lot of extra traffic in the morning or rowdy 20-somethings partying it up at night.

However, regardless of the arguments on either side, Urbanation would like to pose a question: in the planning process (including the work by the councillor and the OMB), should the goal be to minimize negative externalities to current residents, to maximize positive externalities to current and future residents, or a some combination of both?

By example, a couple residents will be hurt by new shadows on their property, noise from the construction site, and others will mourn the loss of the 'village' feel of their community and be forced to look at architecture that they perceive as "too modern", 25 more cars will be added to the area - these are a few of the negative externalities.

Positive externalities include - the owner of the property cashes in on the land sale, the developers make money (in theory!), the community adds a modern tower with more customizable retail space, a more green / energy efficient building is added to the area, local empty-nesters can "age in place" and move to a maintenance free condominium near their old home, a family looking for extra space can now buy their old home, and the additional folks in the neighbourhood can support some of the lagging existing retail space. Of course there are several more, including the jobs created by the construction of the building.

In the end, how does one balance these competing interests? Often times they cannot, and the case is brought before the OMB for a resolution. This quick resolution is what brought several Vancouver-based developers to Toronto instead of having a site tied up for years working on a compromise (an example of a negative externality is the public and private time and money spent on these compromises).

Just recently several councillors proposed having Toronto exempted from the jurisdiction of the OMB. These councillors are reacting to pressure from their constituents that are not happy with recent OMB results. At Urbanation, we tend to agree with comments made by American scholar Cass Sunstein in his assesment of similiar situations south of the border, that this is a poor set of priorities, that reflect a reaction to public pressures more than careful objective analysis.

He goes on to say that lawmakers and regulators may be overly responsive to the irrational concerns of citizens, both because of political sensitivity and because they are prone to the same cognitive biases as other citizens.

NIMBYs look to drum up attention (particularly fear) in local residents about "ghost cities", poor vertical communities like St. James town, out of place towers that threaten the lifeblood of the community - the more emotionally charged the message, the better [keeping in mind that the valid objections can often be overshadowed by the non-valid objections or the method of delivery].

Once a few people are "outraged", the emotional reaction becomes a media story, which grabs more attention and creates more worry and public arousal.

Mr Sunstein suggests that the United States should seek mechanisms that insulate decision makers from public pressures, letting the allocation of resources (negative externalities vs positive externalities) be determined by impartial experts who have a broad view of all risks, and of the knowhow available to reduce those risks.

Is that not exactly what we have in the OMB? Might be a good idea to keep it.

Monday, May 14, 2012

Is the Sky Falling? Real Estate / Bubbles

We put out our Q1-2012 press release last week at about the same time that CMHC released their housing starts data, both generated a plethora of news stories on Toronto real estate, especially the 'overheated' condo market (overheated being the media word, not Urbanation's).

We were truly shocked at how many different newspapers, magazines, and other online sources picked up the story or enquired about the data. Nearly all of these articles included the word "bubble" in their pieces, many with dire warnings of oversupply of units and unsustainable prices. Now Urbanation has commented several times that we do not think the market is experiencing bubble conditions based on the definition of the word, but we have issued our own warnings about the increasing level of unsold supply in the new condominium market and the potential for as many as 25,000 to 29,000 condominium apartment completions in 2013. Our question regards the media's treatment and/or coverage of the info. Is their inclusion of the word bubble in every article just good reporting, a review of a topic that is on everyone's mind, or is it typical media sensationalism?

If you read the comments posted under these articles, you will see that most of the people that comment believe the market crash is imminent. The worst thing is, there appears to be a lot of people that are actively rooting for it! Perhaps we are reading too much into it, but there appears to be a hatred for condominium investors, with commenters hoping for these people to "crash and burn". If you take extreme pleasure in the financial failure of others and actively root for the explosion of your own housing market (so you can afford a unit), then we think there is seriously something wrong with you! If the housing market crashes, there will be a lot of misery, a lot of lost jobs and a lot of losses in the financial markets that would likely hurt these people as well. Be careful what you wish far, not all people that are successful had it handed to them, some worked very hard to get there.

There are no shortage of these folks on the internet, and a great place to find them in on the websites of the notorious market bears. Urbanation has been accused of being biased positive towards the market, that we are a market bull (a mouthpiece for the industry, one person wrote online), despite the fact that we put plenty of 'negative' points in our press releases, and issue our own warnings about the condominium market in the Toronto CMA. Media feeds people's fears and we would be lying if we said we try to put a little fear in the minds of our clients so they feel the need to keep reading our reports (sorry folks)!

In addition, if these market bears were so unbiased, would they be trying to sell you their book, would they be selling advertising on their websites? Sensationalism leads to website clicks and book sales, they can't deny that. This is a debate for another day, but the point is that it is very difficult to be 100% unbiased, especially when there is a financial incentive to take a specific angle.

As long a prices continue to go up in the new condominium market and buildings continue to break ground we will continue to see these articles in the news, however slanted they may be. The problem is that without sufficient data or limited data it is easy to make up a believable story about what is happening out there.

A great example is a story that an bank economist has been telling lately that the rising prices in the new condo market has made almost all investor held units cash-flow negative and they will flood the resale market with units and depress pricing for everyone. Sounds plausible right? The first part is actually based on truth, but the conclusion is based on no factual evidence. If an condominium investor is putting a minimum 15% to 20% down, then yes, they are likely to be in a monthly negative cash flow situation based on their carrying costs (we'll skip all the details). However, based on many of my discussions with agents, brokers, developers and mortgage insurers, many investors are putting much more down when arranging their mortgage, or others are 'adjusting their financing' to put themselves in a positive cash flow situation. In reality, when we ran the numbers on recently registered buildings (past 6 months), only 10% of the inventory in those projects were listed for sale on MLS in Q1-2012, compared to 12% in Q1-2011 and 13% in Q1-2010 and Q1-2009 based on the same metrics. Contrary to what most people would think, the increased level of investor activity in the market has resulted in LESS units listed for resale upon building registration! The minimum down payment investor must have disappeared because the condominium rental market is as hot as ever and there is no rush to sell these units by investors.

A second article warned of foreign buyers snapping up the new condominium units and causing prices to be elevated for everyone! Ban foreign buyers was the conclusion, keep prices affordable for Canadians (it wasn't Don Cherry that wrote it by the way). We have estimated that approximately 10% to 15% of new condominiums are being purchased by foreign buyers, but in a recent television interview, 70% foreign buyers was thrown out by the reporter! This is beyond false and irresponsible journalism. In reality, these foreign buyers are creating more supply in the market and keeping prices down! Foreign investors buy in a condominium projects during the pre-construction phase and help developers reach the 65% to 80% pre-sales required to secure construction financing; they also create a sense of urgency to purchase in these developments when people see how fast the units are moving. Without these foreign investor buyers, many of these projects would not have gone ahead, as many end-users are sceptical about investing in pre-construction and don't have the 15% to 20% to put down. These foreign buyers help these projects get sold in a financially viable time period and hold the units for end-users until registration (or 3 to 5 years after registration), so these end-users can purchase them with 5% down in the resale market.

For an aside to the point made above, the majority of the foreign investors plan to hold and rent their units. So let's do the math. About 20,000 new condominium sales in the CMA, so 3,000 are purchased by foreign investors. So if they sell all 3,000 at registration, then that wouldn't lead to an increase in prices, the extra supply would lead to a decrease in prices! Now if they hold and rent all 3,000 units, would that lead to an increase in Toronto prices? - that really depends on where they set their rents and how they compete with other investor units, but in reality the additional supply of suites would likely depress prices, not increase them. If we had a foreign company come in and build three 500 unit rental buildings in Toronto, one in North York, one in Mississauga and one in Markham, would anyone really care? - the response would likely be very positive!

In closing, be wary of who you trust when reading these articles, there is always another explanation, or another angle to be explored with every story (but look for statistical back-up to their claims). We will try to bring you some of these alternative angles on this blog and in our articles in the New Condo Guide.

Monday, May 7, 2012

Record Quarter For Toronto Condo Sales

Despite brisk activity, anxiety surrounding market remains

TORONTO – May 07, 2012:  Urbanation Inc., the leading source of information and analysis on the Toronto condominium market since 1981, today released its Q1-2012 market overview.

The new condominium apartment market in the Toronto CMA saw 6,070 sales in Q1-2012, the highest of any first quarter on record. The 338 active projects and 84,698 active units were also record highs.  The average of 18.0 sales per project, however, was lower than in Q1-2011 (18.3) and Q1-2010 (20.4)

“Despite the record sales in Q1-2012, Toronto CMA brokers and developers still report anxiety about the future health of the condo market,” says Ben Myers, Urbanation Executive Vice President and Editor. “The probability of a market crash or major price correction is very small, but the prevalence of media coverage for this outcome remains high.”

Despite this, investors and end-users continue to buy. The average sold price index increased to $519 psf in the Toronto CMA, an increase of 2.0 per cent quarterly and 8.1 per cent annually. The average unsold unit is being offered at $566 psf in the CMA. Urbanation estimates that the average price in the new market is $393,000 with an average size of 757 sf.

The resale market was weaker, with resale index pricing decreasing quarterly for the first time since the recession-impacted Q1-2009, falling from $400 psf in Q4-2011, to $396 psf in Q1-2012. That drop represents a 1.0 per cent quarterly decline, although annual growth remained positive at 3.7 per cent. The average resale price also dropped 1.0 per cent quarterly, from $361,000 to $358,000, although it rose 3.8 per cent year over year.

While resale pricing data seems to indicate the market is slowing, there were, in fact, just 64 fewer re-sales in the first quarter, compared to a year earlier (3,888 vs. 3,952), while the average days on the market remained unchanged at 30. In addition, fewer units have sold in newly registered buildings; these new units typically pull the resale average up. Less resale listings in newly registered buildings suggests a larger share of long-term investors, as opposed to speculative ‘flippers’.

In its Q4-2011 release, Urbanation identified unsold supply as one of several potential factors that could potentially derail the Toronto condominium market. There were 15,554 unsold units at the end of Q1-2012, an increase of 4 per cent quarterly and 27 per cent annually.

But as financial institutions, especially those that are Canadian based, move to tighten lending, resulting project cancellations may mitigate the level of unsold inventory.

The market will be further tested in Q2-2012, however, with the potential for as many as 40 new project launches with more than 11,000 new units that could come to market. If the absorption rates for new and existing projects remain constant at 55 per cent and 20 per cent in the second quarter, unsold inventory in the market will still rise to over 17,000 units, nearing the market high of 17,600 from Q4-2008.

“With the market being much larger now, the question is: Is this higher level of unsold inventory the new reality?” asks Myers. “Or is it a sign that the market has reached its peak? We’ll have to see.”


Urbanation is Canada’s leading condominium market research company. Since 1981, Urbanation has analyzed the Toronto condominium market, publishing the “industry bible” – Urbanation’s Condominium Market Survey. This quarterly report tracks new, resale and future condominium projects. The newest report from Urbanation is UrbanRental, which tracks activity in the condominium rental market. Urbanation also provides the development community with essential consulting services, which include site and topic specific market studies and surveys.

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