April 26, 2018 | condos vs houses
For a long, long time houses have often been the better investment in Toronto when compared to condos. Over the past 15 years, they tend to appreciate in value more than condos. It’s a very simple supply and demand situation that makes houses so much more valuable, most of the time. Detached houses generally increase in value at a faster pace than other housing types like semi’s and row houses in addition to all condo types.
But from 2017 to 2018, something unusually happened. Detached houses went DOWN 17.1% on average across all of Toronto and condo apartments went up 10.7%.
It’s a complete reversal of the usual pattern. So, why did this change happen after so many years of the market favouring houses, particularly the cat’s pajamas of housing types, the detached house? How come condos have performed so much better in the past year?
Before we can dig into why condos had stronger sales last year than houses, we need to look at why houses traditionally perform better than condos. So, let’s start with a very simple explanation: A city like Toronto is growing. Because of that, there is more demand for housing. Toronto responds by building more properties. Since there is such a demand for housing and space is limited, the City responses by building more high density housing in the form of condos. Unlike some other cities, like Montreal or New York, Toronto had a surprising amount of vacant land and parking lots in or near its downtown from 2000-2015, though that available land downtown is really at a minimum these days. Still, 20 years ago, there was a lot of room to build high density housing. Because of the City’s Plans to protect the Green Belt, there was more of a mandate to intensify and more condos were built. Also, it is much more profitable for a developer to build a large condo than a two-storey house. It simply does not make sense to build houses so close to the city where demand for housing is so high. From a government point of view, higher density neighbourhoods do pull in more tax dollars as well.
So, Toronto build a lot of condos. So much so, that for a long time Toronto built more condos than any other city in North America, even cities 5 times larger like New York or LA. There was even fear around 2014 that Toronto built an oversupply of housing that could not be absorbed into the system. There were so many new condos coming out that there was a fear that prices would come crashing down. Price increases from 2010 to around 2015 were quite humble for condos since so many units were coming to the Toronto market.
Then there are houses. Very few houses have been built in Toronto in the last 20 years, but the demand keeps growing. So, prices go up. Low supply with very little new supply added to the market makes houses more expensive. So, it is understandable that houses, in chronic low supply with no added supply, increases in value whereas condos, with constant added supply, do not increase in value as much.
But something happened over the past year that turned this pattern on its head. From 2017 to 2018, condos are performing much better than houses. Here are my thoughts on why that is:
- THE HEIGHTS OF 2017 In April of last year, houses hit their highest prices to date in a market where prices went up quicker than we have seen in a long time. In many neighbourhoods in Toronto (but not currently in the suburbs), prices have recovered quite a bit, and the market has bounced back significantly. Still, for the entire city, the huge increases in prices in 2017 could not be sustained for detached house into 2018. I imagine if you compare June of 2017 to June of 2018, when prices came down some last year, we may see an increase in value for detached houses once again year over year. Comparing March and April 0f 2017 to those months in most neighbourhoods in 2018, you will not. In 2017, condos also increased significantly, but not as much as houses. So, there is room for an increase in value from 2017 to 2018 for condos. House prices were so high last year that it is much tougher to have an increase.
- WHO ARE BUYING MOST PROPERTIES NOW A detached house will cost you $1,293,903, on average, and the average Torontonian does not have over a million dollars kicking around to buy a detached house, one that may need even more money if renovation work is required. Some people do. But they are the minority. So, that leaves most of the buyers in this day and age much more likely to buy a condo simply because it is affordable. Condos are simply seeing greater gains because that is where most of the people are able to buy them. The people who would have bought a starter house in 2010 are more likely to buy a condo in 2018 because that is what is affordable to them. Because of there are so many buyers in the affordable condo price range, there is more competition for condos.
- WHEN GENERATIONS CONVERGE More and more people want to live in the city. It includes new Torontonians starting off their career, but it also includes retiring individuals or couples who want to live in a condo with no maintenance on their property. They can be close to social things from going to the museum, a soccer or baseball game or to be close to any kids who live in the city. I hear of more and more grandparents moving to the City to be a caregiver for a toddler or child while the parents are at work. The demand for condos is there. The lifestyle suits a cross-section of individuals from young professionals who want to walk to work or downsizers.
I’m fairly confident that this year is not part of a new trend. Houses will always be in short supply. So, I think the natural setting of Toronto will be to have houses increase in value a little more, on average, than condos. The years ahead will be interesting though. No housing market can sustain the increases Toronto has seen since 2005 or even 2010. There will be slower periods, but currently, I think the demand is very strong to live in a city. We do need more development to accommodate the need. I’m encouraged by the bigger developments I am seeing coming through at Bloor and Dufferin, Dundas and Bloor and in and around Corktown. There seems to be much better planning going on than in the past. In the past, the City was just happy to redevelop toxic and unused land. Now, it is much more careful about what the project entails and how it fits in with the rest of the city.