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Why New Condo Prices Will Not Fall

I came across this phenomenal chart from the fine folks at Realnet showing the inventory levels of new housing/condo launches in the GTA. Newly released product so far in 2012 is down 31% in Toronto (416) compared to what was released by developers at this point last year.

This chart reminds me why those who are trying to ‘time’ the market and are waiting for prices to fall will likely be disappointed. Price reductions of any significance are extremely rare in the new condo market. Yes, I am expecting there will be some reductions from some developers in the second half of this year, and yes, we are already starting to see this happening in pockets, but the reality is it takes something shocking and sudden, like the market crash of 2008, for prices to move downwards on a noticeable level.

The reason for this is simply because when developers can see what is happening in the market, when there are no major and sudden triggers, they can control supply levels. If the market is not where they want it to be, they simply don’t release a new building. Supply is tempered, and prices tend to hold steady (as we are seeing for the most part now).

I suspect that the trend we are seeing so far in the 416 market we will also see in the 905 market in the second half of this year.  So far this year the story has been that the 905 is out-performing the 416, however, I think that will change as we head towards 2013.

The resale market is a totally different animal compared to the new construction market. Stay tuned to this blog in the months to come for analysis of the resale market.

What do you think? Leave a comment or contact me.

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One Response to “Why New Condo Prices Will Not Fall”

  1. Joseph Karim

    Well the requirement a shock the magnitude 2008 is fair more likely than you may imagine.

    For the forces you mentioned I did not expect condo prices to take a large dip until said event took place.

    As for what the trigger point would be?

    There are some compelling candidates, here are some of the macro economic conditions currently at play:

    – Uncertainty over Euro zone solvency (plans in place to further centralize the Euro zone will be met with continued resistance from the European populace, riots in Spain and Greece are just the beginning)

    – China slowing down, China a large consumer of commodities (of Which Canada is a very large supplier), is undergoing further stimulus as a result economic slow downs.

    -Participation for derivatives market for financial indexes is at all time high (i.e. ETFs), while actual market volume and volatility are at all time lows creating a rather precarious ‘systemic risk’ as a result of weakening underlying value (stock market is floating on QE, but the stimulus has failed to produced the same result signaling saturation), of which the large financial institutions in the state have happily shoveled people into (again).

    -U.S. Dollars and treasury bonds are dependent upon reserve status which is held up by it’s Petro dollar deals with OPEC (Saudi Arabia having the largest impact), but America continues to alienate people in the Middle East and it is weakening it’s ties across the world (Bi-lateral trade agreements are springing up everywhere, people are moving away from doing international trade in Dollars, a crucial aspect of it’s reserve status). This along with America’s weakened financial position as a result of fiscal / monetary policy undertaken since 2008 leads to an inevitable currency crisis (it simply a matter of when, rather than if should current policy continue to move in this direction, neither candidate offers a difference in this respect).

    -London offers a flash point of high leverage and low over sight through which many of the largest financial catastrophes and ‘scandals’ were perpetrated [London branches] (Enron, Bernie Maddoff, AIG, MF Global, Goldman Sacs mis-selling, JP Morgan ‘London Whale trade’ etc…)

    -Increasing tension in the Middle East particularly around Syria and by extension Iran creates uncertainty for many geopolitical considerations, not least of which is the Oil Market.

    So there are basically the oil slicks that the Toronto Condo market is surrounded by, I don’t know which will end up being the match but it will not be pretty.

    Condos have always had a tough time appreciating in value due to the fact that the same demographic is more likely to rent in lieu of purchasing a condo (less of an issue with housing, as families may downgrade, but will do their best to stay in ‘a house’). In tough economic conditions condos are the first to get hit, and get hit hard.

    And considering all the uncertainty and ‘systemic risk’ which the world economy is currently stepped in, I would not advise anyone to rush into purchasing a condo, but rather stay as liquid as possible for the coming impact (which some hedges against currency value risk i.e. gold).

    Plenty of opportunities abound if you are prepared.

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