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The secret to successful investing is the ability to forecast demand. If you’re holding equity in an asset class that is sought-after (albeit one whose supply is low), you can expect a more profitable return on your investment. Buying and re-selling condos for a profit in the red-hot Toronto real estate market is directly related to an investor’s ability to foresee demand. Long story short: larger condos (both in room quantity and square footage) are the smart way to invest in Toronto right now.
Here are some tips on forecasting demand and how they will apply to the Toronto condo resale market in the coming years:
DEFINE THE MARKET.
Who will be seeking out and willing to buy your particular kind of property? Why will they seek out exactly what you have to offer (what are their “drivers of demand”, as economists say)? The Toronto Star that millennials (approximately defined as people aged 15 to 34) “have the potential to be the biggest home-buying cohort in history.” And older millennials in their late 20s and 30s are starting families. Condo-buyers with young children would prefer larger condos, but the average new GTA condo has shrunk in square footage by about 16% in just the last decade—that’s even less room for families that are growing. Larger condos are scarcer and scarcer, and exactly during a historical moment when the millennial generation is entering their child-rearing years. (You can about these demographics in our post about young families seeking urban condos in Toronto).
What is the likelihood that your particular type of asset will increase or decrease in quantity in the market? Essentially, how likely is it that your property investment will become scarcer? The Globe and Mailthat one bedroom condos are plentiful, while two-bedroom, two-bath condos are scarce. Even one-bedroom-plus-den units are less plentiful, but highly sought after as millennials start their families. It looks like supply is not set to keep up with demand.
ANALYZE YOUR COMFORT WITH RISK.
While buying a larger condo requires a bigger down payment and higher mortgage payments (thereby tying up more of your resources and your credit), it also comes with potentially higher returns, whether you choose to re-sell or rent the unit to a tenant. Moreover, while 2-bedroom units may initially be more difficult to rent to tenants, when you do find occupants they are more likely to seek a longer-term lease (it’s cumbersome for families with young kids to move). Having stable and trustworthy tenants pays off in the long run, decreasing the likelihood you’ll have to seek new tenants in the near future.
CONDUCT A SENSITIVITY ANALYSIS.
Economists conduct sensitivity analyses to try to pinpoint potential weak spots in their predictions and forecasts; you can do the same with your investment forecast. Ask questions like “What events or factors could cause this forecast to change dramatically?” In Toronto, there are a number of potential factors: for example, anything from tighter mortgage rules to rising interest rates could slow down the booming real estate market, affecting both new construction and supply/demand of existing units. But what is the likelihood of these “sensitivities” actually happening? Experts have predicted that the Toronto housing market’s growth shows no signs of slowing down in the coming years: the that “There’s little room to build more single-family houses to increase the supply,” meaning that condos (and larger ones in particular) will have to bear the brunt of demand. In general, Toronto’s economy looks healthy: the “forecasts economic growth of 2.8% for the metropolitan area in the coming year and predicts employment will grow too.”
CONCLUSION: THE APPETITE FOR LARGER CONDOS IS SET TO GROW.
“The biggest change in the condo market now is the bigger appetite for bigger homes for end users,” Jim Ritchie, senior vice president of sales and marketing for Tridel, a condo development company. Looking at demographics (millennials starting families), geography (the limited space available in the urban core), and economics (the likelihood of stable mortgage rates), a larger condo unit looks like the most efficient and profitable investment for property investors who plan to rent or resell their units over a medium-term time period.