GeoWarehouse

There has been a great deal of speculation in the news over the last few months regarding condo flipping and the condo market in Toronto.  With last year’s stricter CMHC lending guidelines, this summer’s mortgage interest rate increase, as well as the CRA audit targeting aimed at those investing through condo flipping, this hot-button topic has people talking – and for good reason.

Comment: I am also wondering why we are talking about flipping. Didn’t that all die out like 5 years ago? People sell new condos for a variety of reasons. Just because there are a bunch for sale when the building registers does not mean all the sellers are flippers looking for profit. Some are, sure, but many others just have different lives than when they bought the condo 5 years ago. Others have trouble financing with the new rules. Some are married, have kids, have a new job, have moved to another province. Don’t always expect the worst!

According to Canadian Business, new condo sales are dropping to record lows, at a rate of over 30% from January to August of this year. Add to this the fact that there are tens of thousands of condo properties currently being built in the Toronto area, and although a vast majority of them are already spoken for, most owners have yet to make the substantial final payment due upon completion (a daunting concept considering the stricter lending behaviours of banks and the rising mortgage interest rates). This has made some market analysts less than enthusiastic about the future.

Comment: And to date, there have been almost no failed closings due to the new mortgage rules. Sure, there have been some scrambles, but there is no wholesale chaos as many have predicted. On a side note, Toronto new condo sales have fallen because there were fewer projects launched. It is not as if there were the same number for sale and sales dropped.

Some are quick to voice support for the popular theory that this surge is not an issue because the Baby Boom generation will soon be downsizing, and therefore buying these condos. However, this speculation ignores the fact that the construction of new households may outweigh the growth of the population. This could potentially lead to a collapse in home sales and a subsequent loss of jobs.

Comment: What? There are up to 100,000 people coming to the GTA every year, creating 30,000-50,000 new households. Even with 16,021 condos sold last year, where are the other homes that are needed? Freehold homes account for another 12,205 units sold. So the 28,406 new homes sold in the GTA last year are not enough to meet even the minimum requirement for new housing. Resale listings are down 30% as well. See why there are so many bidding wars? And why 59,000 of 60,000 condos under construction are sold?

What about condo flipping specifically? What impact is this having, or expected to have, on the real estate market? A recent Huffington Post article had this to say: “If the upcoming supply of units is not absorbed by demand as they are completed over the next 12 to 30 months, the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.”

Comment: But the supply is absorbed already. Hype mongers like that only ever spout off about “up to 30,000” new condos coming on the market. NOT TRUE. The reality is that maybe 19,000 will complete. And at least 90% of them are sold, if not more. The reality is that the unsold inventory might represent 100-150 a month. In a market that saw 87,111 resales and 28,406 new construction sales last year. Yes, they are throwing a fit over 100 a month out of 10,000. And both of those were slow years!

There is a chance for a decrease in sales in the future; this news is coupled with the recent crackdown on condo flippers (or suspected flippers) by the Canada Revenue Agency. According to The Toronto Star, CRA auditors are focusing primarily on individuals who have purchased condos before they were built, with the intention of selling the condos once building is completed. The article continues stating that any profits made through such a transaction must be reported as income, and if not a principal residence, HST and GST rebates must be recalled. And this is becoming problematic not only for those flippers unaware of tax legislation, but also those forced to sell before or at completion due to extenuating circumstances.

Comment: RevCan is cracking down on everyone, for arbitrary and random reasons. They are going after all sorts of people who are selling “too soon” after registration. My brother-in-law got nailed for renting his out – because he moved to Vancouver. But RevCan doesn’t care, you cannot prove intent to them. Buy 5 years ago, get married and have kids in the meantime, and RevCan nails you for selling the 500-square-foot one-bedroom condo. Yeah, no extenuating circumstances there…  

So, real estate sales professionals, what course of action should be taken to deal with this deluge of attention that buying and selling of condos is receiving? Should you be counselling clients to buy or stay away? Are newly built or resale condos the way to go? Do you think a pre-construction condo is still a good investment? Should you even be voicing these opinions at all? With all the buzz in the news it is prudent to be prepared to answer questions posed by clients regarding condo sales, condo flipping, and the tax legislation regarding these transactions. Clients are far more likely than in the past to have some knowledge, so being unable to answer any inquiries may not bode well for business.

Comment: I counsel my clients to ignore the media, most of it is wrong, the rest is spun to mislead. I voice my opinions, trust me!

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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