[salvius]

I'd like to see the condo concept expanded to include the existing housing stock of big old downtown homes, which could be subdivided and sold off by floors - like flats in England, for instance. First time buyers here are increasingly excluded from purchasing whole houses and must settle for buying a condo in a new multi-unit building, so entire neighbourhoods of the rapidly gentrifying downtown are off-limits to them as purchasers.

Condos are becoming off-limits too.

It's funny, it's easy to make fun of families moving to the suburbs to raise their kids, but frankly, it's becoming the only option for those that:

DO want children
Want to stay in the GTA, and
Aren't super rich.

I'd have no problem with kids sharing a room, but even the 2 bedroom condos are becoming highly unaffordable in anything but the most far-flung areas of town.

I have no idea if there will be a market correction soon. I kind of hope so, because I'd like to be able to afford something by the time I have kids. If it doesn't work out I'll be moving to another more affordable city (so, not the insane Vancouver, but maybe Montreal or Ottawa).

Seriously, how can the people of the supposed 'middle class' (e.g. teachers, architects, etc.) afford to buy anything at all in this market, unless they've either bought into it some time ago or have rich family and/or inheritance?

 

[Prometheus The Supremo]

why do they call it a correction? has everything up 'till now been a mistake?

 

[Edward Skira]

I'd like to see the condo concept expanded to include the existing housing stock of big old downtown homes, which could be subdivided and sold off by floors - like flats in England, for instance. First time buyers here are increasingly excluded from purchasing whole houses and must settle for buying a condo in a new multi-unit building, so entire neighbourhoods of the rapidly gentrifying downtown are off-limits to them as purchasers.

Actually I saw an old 2-3 storey Rosedale mansion on the weekend that was being sold as condos so this seems to be happening.

 

[Urban Shocker]

I wonder if the owner had to jump through lots of bureaucratic hoops to do so?

If we can adapt our existing housing stock to changing conditions, such as the influx of large numbers of people, the condo-ization of large houses is one solution. It'd increase density without having to build new buildings, thus maintaining the character of traditional low-rise residential neighbourhoods all over the city.

 

[Edward Skira]

I wonder if the owner had to jump through lots of bureaucratic hoops to do so?

Not sure but I can tell you I was quite surprised to see a condo for sale sign in front of an old two storey mansion on a Rosedale side street.

 

[Urban Shocker]

There's life in the old city yet!

 

[beaconer]

Although not exactly mansions, it is common in Boston for houses to be converted to "condos". In particular, older homes in Cambridge (I am sure in other areas too), as well as the brownstones throughout the different areas (South End, Beacon Hill,etc).

 

[Urban Shocker]

Riverdale seems headed for a crash - if a price bubble exists anywhere surely it is there, the way things have been going in the past year or two.

The decrepit, abandoned detached mansion at 1 Langley just sold for $870,000; the semi on the same street that wasn't lived in for about twenty years and was falling apart and full of rodents ( pity the neighbours! ) just went for $495,00; and the detached house next to it where the reclusive old man who owned all three homes and who died last summer in one of them lived just sold for $664,00. All will need massive amounts of renovation.

 

[vultur]

Condo Troubles

The amount of new condo product in places like Miami pales in comparison to the tidal wave of development in Toronto. Although much of the product in Toronto has been put under contract prior to construction, a strong case can be made that a very large percentage of those buyers were foreign specuvestors and not end users. That crowd of buyers is very prone to panic and the situation in Toronto could easily reverse itself as it has in so many big American markets with a fraction of the inventory of Toronto.

____________________________


PAGE ONE


DEFAULT LINES
Condo Troubles
Further Squeeze
Property Lenders
Full Force of Glut Is Felt
As Buyers Back Out;
'More of the Iceberg'
By ALEX FRANGOS
August 25, 2007; Page A1

For the nation's real-estate lenders, the other shoe may be about to drop: condominiums.

Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country -- including parts of Florida, California and Washington, D.C. -- are seeing rising foreclosures and bankruptcies of entire condo projects.
[Flodding the Market]

The problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting, seek ways to back out as they encounter trouble getting financing in the suddenly dicey mortgage market. Falling prices are forcing appraisals down, so banks aren't willing to lend the full amounts that people committed to in the sales contract.

"Closings that are scheduled to take place are not taking place," says Marvin Moss, a North Miami Beach real-estate attorney. He is suing several developers to help clients get out of contracts.

The condo market, while tied to the housing market overall, behaves differently under stress. While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now.

With single-family homes, "you put up a couple of model homes and build the rest as you get sales contracts." says James Haughey, director of research at Reed Construction Data in Norcross, Ga. "But you have to build the entire...building before you can sell a single condo."

In 2006, the number of new condominium units completed jumped 145% to 102,800, from 41,900 in 2003, according to the U.S. Census Bureau. Last year was the highest level since 1985, when 135,800 units were built. So far this year, 48,354 units have been built and another 72,000 are under construction, according to New York research firm Reis Inc.

Downtown San Diego can expect 2,900 new units to arrive on the market in the next year, according to real-estate investment brokerage Marcus & Millichap. Hessam Nadji, a managing director at the Encino, Calif., firm, estimates it will take as long as 18 to 24 months for the most-saturated markets to buy up the glut of condo inventory -- if the economy overall stays strong.

Miami is in worse shape: The city added 4,549 condo units in 2006 and 3,276 so far this year. Another 7,985 will be delivered by the end of the year, with another 8,260 slated for 2008 to 2011, according to Reis, for a grand total of 24,070 news units between 2006 and 2011.

"More of the iceberg is being revealed, but we haven't seen it all yet," says Norman Radow, an Atlanta real-estate investor who works with lenders to rescue distressed condo complexes.
MORE

• Complete Coverage: Debt Dilemmas

Typically, condo developers are required to pay off construction loans shortly after construction is completed. But with sales stalled, more developers are defaulting, creating headaches for banks and real-estate funds that financed the projects.

The percentage of bank construction loans overall that are in default has risen to 2.3% in the second quarter of 2007 from 1.0% at the end of 2005 . "Condos are a significant share of defaults and delinquencies going on," says Matthew Anderson of Foresight Analytics, an Oakland, Calif., research firm. His analysis shows condo lending ballooned to $31.3 billion in 2006 from $8.4 billion in 2003. These figures don't include the large amounts flowing into condos from hedge funds and investment banks.

One of the biggest condo lenders, Chicago's Corus Bankshares, has seen its $3.7 billion portfolio of condo loans deteriorate. The value of the bank's nonperforming assets has skyrocketed to $242 million in the quarter ended June 30 from $620,000 a year ago. The bank continues to be profitable, and made three new condo loans worth $400 million, though it predicts darker times are ahead. "It would not surprise us to see an even greater impact on earnings over the next several quarters, or even years, depending on when the market improves," Chief Executive Robert Glickman said in a note to shareholders.

The failures so far have been concentrated among developers that bought land -- or existing rental apartments to convert to condos -- at the top of the market in late 2005 or early 2006. The worst collapses have so far involved condo conversions. Developer Triton Real Estate Partners of Annapolis, Md., bought a Rockville, Md., complex known as the Pavilion in November 2005 for $117 million, with plans to pump in $30 million to upgrade and sell the units. There are 434 units, so the average price it paid was $271,000 a unit. Triton changed the name to the Monterey and offered the one- to three-bedroom units for $300,000 to $500,000.

The sales didn't materialize and Triton failed to pay its lender, CBRE Realty Finance of Hartford, Conn., which foreclosed on the property in May. With the sales market on the rocks, the lender had to write down the project's value by $7.8 million, forcing the company to record a $4.6 million loss in the second quarter. The commercial-property lender, incorporated as a real-estate investment trust, has stopped making new investments and almost missed a $17 million payment on a line of credit from Wachovia Corp. It hopes to restart the sales program at the Monterey complex shortly.

Triton and CBRE declined to comment.

Buyer's remorse is also causing problems for some developers. Cindy Cicala plunked down a 10% deposit on a $370,000 two-bedroom condo in a new project in Tampa, Fla., in August 2004 -- a time when investors were elbowing each other aside to sign contracts. The site was particularly attractive to Ms. Cicala because, in addition to superb views, her unit was to be finished by August 2006, making it one of the first high-rise residences to be built in the city's reviving downtown.

But in April, 2005, the developer asked for an extension. "It was just one delay after another," says Ms. Cicala, a 51-year-old residential-mortgage broker. She decided she didn't want to close on the condo, claiming the developer hadn't held up its end of the contract. Ms. Cicala says she asked for her deposit back but hasn't received it, so she sued under a federal law that guarantees condos must be delivered within two years unless the developer can prove certain extenuating circumstances.

Her attorney, Harry Lee Coe IV, says Ms. Cicala and other clients "are seeing their investing potential has dwindled, and they are now no longer at the front of the pack -- and you don't want to be in the middle of the pack in a bad or down market."

Left holding the bag amid the defaults and foreclosures are the banks and real-estate investment funds that lent money to people such as Farbod Zohouri, an Atlanta developer who took out $300 million in loans for more than a dozen projects in 2005 and 2006. Within a year, all were foreclosed or had filed for bankruptcy protection.

In a sign of how widespread the condo frenzy was among lenders, Mr. Zohouri's financing sources ranged from tiny local banks to Lehman Brothers, which lent him $180 million for two Orlando condo-conversion projects that flopped. Several commercial banks lent him money for five projects, despite his relatively small operation and spotty track record, which included a settlement with the federal government on mortgage-kickback allegations.

Mr. Zohouri, who goes by "Fred," says he is "an honest person" who is working hard to get his investors' money back. He says because of possible legal actions, he can't explain exactly what went wrong.

Underlying the defaults was a loosening of lending standards. In the past, wary of the high risks posed by condo sales, lenders such as commercial banks would give money to condo projects with the understanding that if the condos didn't sell, the developer could rent them and still repay the loan. That would limit the amount banks would lend, because the cash from renting units is slow and steady and can cover a smaller amount of debt than the amount generated by selling all units within a year of completion, as most condo projects aim to do.

But in the latest boom, a host of nonbank lenders began throwing cash at condo projects, allowing developers to pay prices for land and buildings such that they could pay back the loans only if the units sold at high prices.

Mr. Radow, the Atlanta real-estate investor, says troubles in the condo market stem from the proliferation of new players in the real-estate finance world, many of whom never went through bad times. Before the condo boom, there were only about a dozen major sources of equity or mezzanine debt, the riskiest -- and potentially most rewarding -- parts of real-estate finance. In past five years hedge funds, real-estate funds, private equity and community banks all got into the act.

"Who are managing all the funds?" Mr. Radow asks. "Where did all the real-estate experts come from?"

--Jennifer S. Forsythe contributed to this article.

Write to Alex Frangos at alex.frangos@wsj.com

 

[Observer Walt]

The real estate market in the U.S. is very different from Canada, and retains many characteristics of the Wild West. Just one indication is the comment in this article that "a condo developer builds all at once and hopes for the best, adding risk". That's precisely what doesn't happen in Canada, where sales take place first, then construction. Maybe eventually this concept will come to be accepted in places like Miami.

Investors in Toronto are currently buying only about 20% of new condos, according to informed talk in the business, and a much lower percentage than that in the resale market. This is down very substantially from the early 1990s, when investors had 40% to 50% of new construction, depending who you spoke to, and perhaps not coincidentally the market was going sharply downhill.

I also don't accept the glib assertion that investor = speculator. Many of these people are in for the long haul, particularly those based in some foreign locations where Toronto represents a real bargain, both in terms of pricing and in terms of economic and political stability.

 

[vultur]

Walt-

A new condo costs $360 per square foot on average. A 800 square foot condo costs $288,000. It probably rents for about $1,700 or $20,000 annually (please correct me if I am mistaken). Property tax is about $3,600, CAM about $4,000 ($0.50 per square foot), Insurance and Maintenance another $1000 for total operating costs of about $8,000 and a net income of about $12,000 before any management costs for leasing, reserves, etc.

$12,000 on $288,000 is a 4% return, less than you would earn in your ING direct account. An average multiplex would probably yield about 6.5% and you could hire a professional property manager to deal with all operation and management issues. How is a return that generates less than the cost of money not by definition speculative? The buyer has purchased in the hopes (dreams) of being able to sell it for a profit in the future. Fair enough and good for him. However, that is precisely the kind of thing that created the subprime mortgage meltdown in America. Buy now in the hopes of selling later at a profit simply because real estate always goes up. It is pure speculation.

I agree the correction will not be as severe as it was in the early 1990's because there is not as much speculation as there was at that time. Instead of prices falling 40% they could fall 15%-20%. As far as the Toronto condos being cheaper than condos in other countries, this point is just completely moot. Toronto condo and housing prices are a function of the local economy and local population and household income factors. Just like any non-tourism based city. People in Toronto will pay what they can reasonably afford, not a discount to what people are paying in some far off land.

Thank you for commenting and for allowing me the opportunity to debate this topic.

 

[yyzer]

As far as the Toronto condos being cheaper than condos in other countries, this point is just completely moot. Toronto condo and housing prices are a function of the local economy and local population and household income factors. Just like any non-tourism based city. People in Toronto will pay what they can reasonably afford, not a discount to what people are paying in some far off land.

on this point, vultur, you are absolutely correct...

Instead of prices falling 40% they could fall 15%-20%

On this point, I do hope that you are wrong...because for all those folks who bought with 5% down, they will be dead.

What's dangerous about many of your posts, vultur, is that they usually contain a few grains of truth...but there are differences between here and, say, Miami. Most of all of Miami's new construction condo sales went to offshore buyers, mostly from South America. Toronto's numbers contain some offshore interest, but the vast majority of the deals that I have seen here, are with locals.

Also, the subprime lending market in the U.S. has been estimated at up to 20% of all the lending there - here in Canada, it is less than 5%. So our conservative banking system may end up protecting us.

Is there risk today in the Toronto market? Probably, up to a point, but by your own words, the market is a function of the local economy, population and household income. On that score, we are doing just fine, no?

 

[vultur]

I think you are correct YYZ. However, the recent flurry of buying appears to be dominated not by locals but by syndicate groups. What concerns me as an investor in Toronto real estate is this kind of behavior can spark a price bubble that leads to a painful correction at the other end. I agree that in Canada lenders are more stringent in their underwriting standards, but even here lenders have been extremely aggressive. Go to a movie and watch a BNS commercial for a 100% mortgage for that shiny new downtown condo unit! Also, in America buyers typically lock in for 30 years whereas the average term here is 5 years, leaving a buyer more exposed to interest rate fluctuations.

When condo units return to more reasonable valuations where operating income can service debt I will jump into this market and make my move. Until then I see a milder version of what has occurred in many American cities. We have only the brokers and the offshore syndicates to thank for this trend. The liquidity trap could very well unravel this cord quickly for the 4th quarter.

Good discussion though. I would love to see some real stats on the composition of new GTA condo buyers if available. Most of what I've read has been only estimates and you must admit that developers are not going to proactively reveal that 50% of their project has been sold offshore (waterpark....eeehhhhmmm...city....)

 

[rbt]

I would love to see some real stats on the composition of new GTA condo buyers if available. Most of what I've read has been only estimates and you must admit that developers are not going to proactively reveal that 50% of their project has been sold offshore (waterpark....eeehhhhmmm...city....)

Difficult to obtain those kinds of numbers because it swings wildly from one building to another and very few people have indepth knowledge on a large number of sites.

Many sales representatives don't know what their building has and will simply make up a number on the spot. They're paid quite well to obscure the truth, so that's what they do.

Some locations have 0% foreign ownership. Others are close to 100%. Most sit somewhere between those two points.


I think the general trend is probably related to marketing budgets and profile of the building. Low profile small budget buildings tend to be largely local ownership. I, of course, don't have hard evidence of that and little anecdotal evidence.

 

[Observer Walt]

I hear a certain amount of "anecdotal" evidence, from reasonably informed sources, and I am told by more than one source that "investor" purchases in new projects are running at about 20% on average as I mentioned earlier, although certainly this varies from one project to the next. I don't know where you would get solid statistics, as this is usually considered proprietary information. Smart developers generally will not want to see a high proportion of units going to investors. There are some exceptions (if I may name a name, projects marketed by Baker Real Estate are said to attract a higher amount of "offshore" interest).

Vultur, you make good points and I think your numbers generally stand up to scrutiny. But without wanting to split hairs, I think "speculation" is a word that should be carefully used or carefully defined. Almost any real estate purchaser, whether investor or end-user, anticipates a growth in the value of the real estate over time. It is perfectly legitimate to take this into account when making a purchase decision. In fact, thank goodness that most investors do. Otherwise, as you point out yourself, many or most investments would not be made, as the operating return is usually less than the cost of capital, or sometimes less even than could be achieved in a risk-free Canada bond. In a scenario where only the operating income were considered, we would have very little rental real estate available!

Real estate investment analysis quite explicitly takes into account both components of the projected return, the operating income and the anticipated capital gain.