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.
Tuesday, May 22, 2012
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.
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.”
ABOUT URBANATION
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.
MEDIA CONTACT: Vicki Griffiths
Vicbar Marketing Limited
416-510-0073
Friday, March 9, 2012
Why Rent-to-Resale Calculations are Bunk
We read a great blog post recently by John Pasalis of Realosophy: click here
John touched on 'rent multiples' and that several reports on the Canadian housing market have used this measure to determine that Canada and several areas within it are "overvalued". The hypothesis is that the gap between the average rent and the average resale price has been expanding and that the average rent is a baseline for affordability, and that an area is valued ‘correctly’ or the area is balanced if the average rent and average price move in parallel. John puts it in slightly different terms:
The theory is that house prices should be appreciating at a similar rate to rents. If house prices start to appreciate at a much faster rate than rents it suggests that house prices are overvalued... ...Eventually, more people start renting until rents rise and/or house prices fall to a level where there is no material financial benefit to renting over buying.
Many of the charts for major Canadian centres shows that the gap between the average resale price and average rent has widened and the conclusion naturally is that housing in overvalued. Not sure why this doesn't suggest that rents are undervalued, and a major upward correction in rents is imminent?
Regardless, this methodology is fatally flawed for several reasons: it does not factor in the age, size and exact location of the units in question. Secondly, the source of the rental information has been called into question, especially with the major expansion of the private rental market, the inclusion/exclusion of heat, hydro, water, cable etc. A third major factor is the existence of rent controls in certain areas. A fourth factor is the existence of a low interest rate environment that allows the average home owner to purchase a larger, more expensive home (or simply get in the market) with a lower monthly payment.
The key point to take out of the above is the first one. We are a firm that looks at averages frequently, but they can often mask or misrepresent data due to outliers and other factors. And consequentially, WHEN DRAWING CONCLUSIONS BASED ON THE RELATIONSHIP BETWEEN TWO VARIABLES, ONE MUST CONSIDER A THIRD (or fourth, fifth, sixth, etc) VARIABLE THAT COULD BE INFLUENCING THE RELATIONSHIP.
We'll provide a simple example using sports. Let's say I took three NBA teams (Spurs, Lakers, Magic) and looked at their average rebounds per game in a year and their winning percentage in those years. Wow, the relationship shows that a major improvement in rebounds per game in 97-98 led to much higher wins for the Spurs that year. We also saw rebounds and wins jump for the Lakers and 96-97, but both dropped in 04-05. There was a major improvement in 04-05 in rebounds and wins for the Magic.
Therefore we draw the conclusion that the more rebounds you get, the more wins your team will get. The Raptors see this data and go out and sign 5 guys that are 7'3" tall. The next year the Raps dominate the league in rebounding but win only 5 games, what! They should have seen an increase in wins right? Wrong, the five players can't cover anyone on the outside, can't play defence, but because they are tall they get lots of rebounds. They can't shoot, so they keep grabbing their own offensive rebounds and missing again!
So what went wrong in our analysis above? There was a third factor that contributed both to the increase and decrease in rebounds and wins in the above example, the Spurs added Tim Duncan in 04-05, Shaq came to the Lakers from 1996 to 2004 and the Orlando Magic added Dwight Howard in 2004 and all added new dynamics to their teams including shot blocking, scoring, passing, and confidence, in addition to their rebounding skills.
This is a typical example given in any economist's first year Econometrics class. The economists making these 'overvalued' statements should pull that textbook back off the shelf and take a look at it again. In economics you must 'control' outside variables, keep them as constant as possible so you can really determine the relationship between the two variables you are looking at.
In terms of rent multiples, you could potentially have a beach city building tons of 2,000 sf rentals overlooking the ocean and small 1,000 sf bungalows on outskirts of town and you compare that to a town building a bunch of 3,000 sf McMansions on estate lots and then small rentals on the outskirts near an industrial park, the rental multiples will be very different for those to areas, which one is really overvalued?
Although our data (from our UrbanRental report) is limited, having only begun collecting data for our reports over the past two years, we looked at the relationship between index rents and index prices in the Toronto CMA condominium apartment market. To avoid having the data skewed by location or age of product, we looked at ‘matching pairs’ of data only, dividing the average price psf by the average rent psf at a specific building. We looked at the weighted average (by total resale and rental transactions) of our rental multiple for some of the top municipalities and the Toronto CMA overall by looking at data points for the same buildings in Q4-2010 and Q4-2011. Using the index price and index rent, further controls for the size of the suites. In this example we were able to control for the location, age and size of the units. However, there are a few measures we couldn't control for: the floor that the unit is on (condo rentals tend to be on lower floors), parking (more units are rented without parking than resale units), renovations (resale units tend to be renovated more often than rental suites), terraces (units with large terraces or balconies tend to be owner occupied), etc, etc. See the table below.
If the hypothesis of a ‘balanced’ market held true, the rent multiples would remain the same year-over-year, however all the major municipalities increased with the exception of Richmond Hill. Therefore all markets are, in effect, less affordable than last year if one believes that rental rates are the baseline for affordability. The Toronto CMA is 3.1% less affordable (or overvalued) in comparison to last year.
Scarborough’s rent multiple increased by 10% in Q4-2011 over Q4-2010, the largest increase among the municipalities above, followed by Vaughan at 7.4% and Mississauga at 6.6%. The former City of Toronto increased by just 1.4%.
Urbanation would find it hard to believe that Scarborough condominium apartment units became much more overvalued than the former City of Toronto in 2011 and that Richmond Hill units became more affordable. According to John Pasalis, even Windsor is currently overvalued based on the metrics discussed earlier.
At Urbanation we do not believe that pricing will go up forever, or that Toronto's condominium market is not showing potential signs of future weakness, however is not because of an "out of whack" rent multiple. Look to Urbanation for reasoned, unbiased data on Toronto's condominium market from the firm that has tracked it longer than any other firm.
John touched on 'rent multiples' and that several reports on the Canadian housing market have used this measure to determine that Canada and several areas within it are "overvalued". The hypothesis is that the gap between the average rent and the average resale price has been expanding and that the average rent is a baseline for affordability, and that an area is valued ‘correctly’ or the area is balanced if the average rent and average price move in parallel. John puts it in slightly different terms:
The theory is that house prices should be appreciating at a similar rate to rents. If house prices start to appreciate at a much faster rate than rents it suggests that house prices are overvalued... ...Eventually, more people start renting until rents rise and/or house prices fall to a level where there is no material financial benefit to renting over buying.
Many of the charts for major Canadian centres shows that the gap between the average resale price and average rent has widened and the conclusion naturally is that housing in overvalued. Not sure why this doesn't suggest that rents are undervalued, and a major upward correction in rents is imminent?
Regardless, this methodology is fatally flawed for several reasons: it does not factor in the age, size and exact location of the units in question. Secondly, the source of the rental information has been called into question, especially with the major expansion of the private rental market, the inclusion/exclusion of heat, hydro, water, cable etc. A third major factor is the existence of rent controls in certain areas. A fourth factor is the existence of a low interest rate environment that allows the average home owner to purchase a larger, more expensive home (or simply get in the market) with a lower monthly payment.
The key point to take out of the above is the first one. We are a firm that looks at averages frequently, but they can often mask or misrepresent data due to outliers and other factors. And consequentially, WHEN DRAWING CONCLUSIONS BASED ON THE RELATIONSHIP BETWEEN TWO VARIABLES, ONE MUST CONSIDER A THIRD (or fourth, fifth, sixth, etc) VARIABLE THAT COULD BE INFLUENCING THE RELATIONSHIP.
We'll provide a simple example using sports. Let's say I took three NBA teams (Spurs, Lakers, Magic) and looked at their average rebounds per game in a year and their winning percentage in those years. Wow, the relationship shows that a major improvement in rebounds per game in 97-98 led to much higher wins for the Spurs that year. We also saw rebounds and wins jump for the Lakers and 96-97, but both dropped in 04-05. There was a major improvement in 04-05 in rebounds and wins for the Magic.
Therefore we draw the conclusion that the more rebounds you get, the more wins your team will get. The Raptors see this data and go out and sign 5 guys that are 7'3" tall. The next year the Raps dominate the league in rebounding but win only 5 games, what! They should have seen an increase in wins right? Wrong, the five players can't cover anyone on the outside, can't play defence, but because they are tall they get lots of rebounds. They can't shoot, so they keep grabbing their own offensive rebounds and missing again!
So what went wrong in our analysis above? There was a third factor that contributed both to the increase and decrease in rebounds and wins in the above example, the Spurs added Tim Duncan in 04-05, Shaq came to the Lakers from 1996 to 2004 and the Orlando Magic added Dwight Howard in 2004 and all added new dynamics to their teams including shot blocking, scoring, passing, and confidence, in addition to their rebounding skills.
This is a typical example given in any economist's first year Econometrics class. The economists making these 'overvalued' statements should pull that textbook back off the shelf and take a look at it again. In economics you must 'control' outside variables, keep them as constant as possible so you can really determine the relationship between the two variables you are looking at.
In terms of rent multiples, you could potentially have a beach city building tons of 2,000 sf rentals overlooking the ocean and small 1,000 sf bungalows on outskirts of town and you compare that to a town building a bunch of 3,000 sf McMansions on estate lots and then small rentals on the outskirts near an industrial park, the rental multiples will be very different for those to areas, which one is really overvalued?
Although our data (from our UrbanRental report) is limited, having only begun collecting data for our reports over the past two years, we looked at the relationship between index rents and index prices in the Toronto CMA condominium apartment market. To avoid having the data skewed by location or age of product, we looked at ‘matching pairs’ of data only, dividing the average price psf by the average rent psf at a specific building. We looked at the weighted average (by total resale and rental transactions) of our rental multiple for some of the top municipalities and the Toronto CMA overall by looking at data points for the same buildings in Q4-2010 and Q4-2011. Using the index price and index rent, further controls for the size of the suites. In this example we were able to control for the location, age and size of the units. However, there are a few measures we couldn't control for: the floor that the unit is on (condo rentals tend to be on lower floors), parking (more units are rented without parking than resale units), renovations (resale units tend to be renovated more often than rental suites), terraces (units with large terraces or balconies tend to be owner occupied), etc, etc. See the table below.
If the hypothesis of a ‘balanced’ market held true, the rent multiples would remain the same year-over-year, however all the major municipalities increased with the exception of Richmond Hill. Therefore all markets are, in effect, less affordable than last year if one believes that rental rates are the baseline for affordability. The Toronto CMA is 3.1% less affordable (or overvalued) in comparison to last year.
Scarborough’s rent multiple increased by 10% in Q4-2011 over Q4-2010, the largest increase among the municipalities above, followed by Vaughan at 7.4% and Mississauga at 6.6%. The former City of Toronto increased by just 1.4%.
Urbanation would find it hard to believe that Scarborough condominium apartment units became much more overvalued than the former City of Toronto in 2011 and that Richmond Hill units became more affordable. According to John Pasalis, even Windsor is currently overvalued based on the metrics discussed earlier.
At Urbanation we do not believe that pricing will go up forever, or that Toronto's condominium market is not showing potential signs of future weakness, however is not because of an "out of whack" rent multiple. Look to Urbanation for reasoned, unbiased data on Toronto's condominium market from the firm that has tracked it longer than any other firm.
Thursday, February 23, 2012
Harvey Kaufman
We were very saddened to hear of the passing of Harvey Kaufman of Norman Hill Realty a couple weeks back, he was a big favourite in the Urbanation office. Harvey handled the sales of a number of high profile developers including The Pemberton Group, Menkes Developments, and The Conservatory Group to name a few.
After many years of trying to get Harvey to sign up for our report we just gave up, but were happy to exchange info with him whenever we could and express our opinions on this site or that. The most admirable trait possed by Harvey had was his ability to stick up for himself and what he beleived in. There were many a times that a developer told him not to give data to us and he told them it was the right thing to do, that Urbanation provides a valuable service to the industry and assists many of the lenders, suppliers, appraisers that work on their projects make more informed decisions. That takes a lot of stones when dealing with some of the clients he did and we thank him one last time for it.
Many of the jokes and insults that Harvey told us we won't be sharing on this blog, but trust us, they were priceless. We wanted to make sure we acknowledged how much me thought of him and hope his family is doing well. Our condolences.
After many years of trying to get Harvey to sign up for our report we just gave up, but were happy to exchange info with him whenever we could and express our opinions on this site or that. The most admirable trait possed by Harvey had was his ability to stick up for himself and what he beleived in. There were many a times that a developer told him not to give data to us and he told them it was the right thing to do, that Urbanation provides a valuable service to the industry and assists many of the lenders, suppliers, appraisers that work on their projects make more informed decisions. That takes a lot of stones when dealing with some of the clients he did and we thank him one last time for it.
Many of the jokes and insults that Harvey told us we won't be sharing on this blog, but trust us, they were priceless. We wanted to make sure we acknowledged how much me thought of him and hope his family is doing well. Our condolences.
Monday, February 6, 2012
Urbanation Press Release: Q4-2011 Condominium Market - Toronto CMA
MEDIA CONTACT: Vicki Griffiths
Vicbar Marketing Limited
416-510-0073
Urbanation Reports 2011 SALES SHATTER PREVIOUS Record high
What does 2012 hold for Toronto’s condominium market?
TORONTO – February 6, 2012: Urbanation Inc., the leading source of information and analysis on the Toronto condominium market since 1981, today released its Q4-2011 market overview.
The 7,226 new sales in Q4-2011 were not only the highest of any fourth quarter on record, they helped the Toronto CMA reach a record high of 28,190 new condominium apartment sales in 2011. This caps a truly unprecedented year – one that smashes the previous record of 22,654 sales set in 2007 by an astounding 24 per cent.
Urbanation tracked a total of 357 condo project in Q4-2011, 330 active projects containing 81,274 units, with 5,464 units in the 27 sold out (and not registered) projects.
But with the record year 2011 behind us, industry participants and purchasers are asking: What comes next? Are the numbers a cause for celebration or for concern?
“The more successful the condominium market is in Toronto, the more reports surface warning of oversupply or a correction in prices,” says Ben Myers, Urbanation Executive Vice President and Editor. “Because the underlying realities of the market are constantly changing, we wanted to take off our ‘rose coloured glasses’ and review potential factors, both economic and psychological, that could derail the high-rise market in Toronto in our latest report.”
Urbanation identifies speculative purchasing, over-leveraging and herd behavior as risk factors for a market correction. Regarding speculation, the Toronto CMA has seen very few resale projects experience a ‘dump’ of units at registration; meaning purchasers are likely long term, hold-and-rent investors. A 2011 survey of Urbanation industry participants revealed that only 57 per cent thought that more than 10 per cent of condo suites were being assigned pre-registration. That’s a drop from the 70 per cent of respondents who felt that way in 2010.
The 2011 survey also showed that there was little concern with the level of international activity in the market. Leverage was also not identified as a major concern, leading Urbanation to believe that condominium investors are well capitalized.
Based on the responses to Urbanation’s latest survey, the biggest concern going into 2012 is that unit prices are rising too quickly (according to 53 per cent of respondents, up from 34 per cent who expressed the concern about pricing in 2010.)
Despite the concern, the unsold index price inflation was moderate in the new condominium market at 5.1 per cent annually to $557 psf, while the former City of Toronto saw prices rise just 2.5 per cent from $646 psf to $662 psf. Unsold units were offered at $835 psf in the Downtown Core at the end of the fourth quarter, an increase of 15.5 per cent over Q4-2010 ($723 psf), a significant jump.
While Urbanation’s 2011 survey showed respondents had less trepidation in 2011 regarding a potential oversupply than there was in 2010 (21 per cent versus 6 per cent), unsold supply increased 13 per cent in Q4-2011, the largest quarter-over-quarter jump for the Toronto CMA since Q2-2008. The 14,969 unsold units at the end of Q4 represent the highest level recorded since the mini-recession in Q1-2009 and an 8 per cent increase over Q4-2010.
Myers added “the key statistical indicators that Urbanation reviews quarterly in our publication are still positive, seller’s market conditions in the resale market and strong demand for condominiums in areas that have not previously supported high-rise densities. We anticipate that the market will remain strong in 2012, with over 20,000 new condominium sales” Urbanation’s survey respondents believe the results will be slightly lower, with 41 per cent predicting sales between 17,500 and 20,000. It is worth noting that, in Urbanation’s 2010 survey, 39 per cent of respondents forecasted 13,000 to 15,000 new sales for the Toronto condominium market for 2011 – half of the final record breaking result.
ABOUT URBANATION
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.
Thursday, November 3, 2011
Urbanation Press Release: Q3-2011 Condominium Market - Toronto CMA
MEDIA CONTACT: Vicki Griffiths
Vicbar Marketing Limited
416-510-0073
Urbanation Reports a Hot Condo Market for Q3
Yearly new condo sales paced to smash 2007 sales record
TORONTO – November 3, 2011: Urbanation Inc., the leading source of information and analysis on the Toronto condominium market since 1981, today released its Q3-2011 market overview.
The new condo market in the Toronto Census Metropolitan Area (CMA) continues its torrid sales pace, with Q3-2011 marking the fourth consecutive quarter in which sales topped 5,000, with 6,318 new condo sales. That marks an increase of 66 per cent over Q3-2010 (3,805) but a decrease from the record high sales of Q2-2011 (9,445).
There have been a total of 27,244 sales in the past 12 months, while new condo sales through the first nine months of 2011 have already surpassed the 2010 year-end total (20,964 versus 20,491).
Approximately 58 per cent of the CMA sales in Q3 were realized in 33 new site openings (3,694 sales, a 56 per cent absorption rate) as newly launched projects continue to sell well and attract new purchasers.
“With these unprecedented sales successes continuing and with the increased investor activity, there are concerns that pricing will, or is, rising too rapidly on speculative buying decisions,” says Ben Myers, Urbanation Executive Vice President and Editor. “However, annual index price growth remains below the five-year average of 8.1 per cent, at 7.4 per cent in the new market, and equal to the five-year average in the resale market (7.6 per cent increase).”
Myers notes, however, that some factors could mask the fact that prices are rising too quickly, including the influx of lower-priced condominium projects in the ‘905’ and outer ‘416’ areas, which can pull down the overall average index price in the Toronto CMA. Key areas in the CMA are experiencing year-over-year index price inflation that is above the five-year CMA average, including Mississauga (10.2 per cent), the former City of Toronto (9.0 per cent), and Markham (8.6 per cent).
In response to concerns about the amount of investment activity in the Toronto CMA, Myers points out that data indicate the investor market is comprised of more long-term micro-landlords than short-term speculators.
“The majority of buyers that do not intend to occupy the suite they purchased are adopting long-term investment strategies and avoiding short-term market price fluctuations resulting from potential over supply or other factors,” he says.
Urbanation tracked a total of 346 new condominium projects in Q3-2011 (an increase of 18 per cent annually). Unsold inventory increased 7 per cent quarterly in Q3 to 13,259 units, but is virtually unchanged annually from the 13,257 unsold units in Q3-2010.
There were 5,364 construction starts and 1,607 completions in Q3-2011, while the 42,573 units under construction are a record high for the Toronto CMA.
But projected population growth, cultural changes, longer commuting times, shortage of land, greenbelt legislation and high-density targets within the Places to Grow provincial initiative are all precipitating a fundamental shift away from low-rise housing, Myers says.
“All of these reasons will continue to tip-the-scale towards apartment living.”
Looking ahead, Urbanation predicts that the CMA will smash the annual sales record of 22,654 recorded in 2007, with approximately 26,000 sales expected by years-end.
- 30 -
ABOUT URBANATION
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.
You Tube Channel: Urbanationca
Subscribe to:
Posts (Atom)