Condo prices in Toronto somewhat defy conventional economic logic and wisdom. Normally, based on the laws of supply and demand (the forces that drive a capitalist economy), when you have a lot of something, the price of that something tends to go down. An abundance of something typically leads to price drops, in order to encourage purchase of the item, particularly by those who weren’t originally considering it. But the condominium market in Toronto is presenting economists with an interesting case study. Regardless of how many condo units are being constructed and sold in the GTA, prices appear to be going up. According to the Motley Fool, there were more than 56,000 condos under construction in Toronto at the end of 2014, which far outweighs the number of units being built in other much larger municipalities like Chicago, Los Angeles, or New York.
So what’s actually causing condo prices in Toronto to skyrocket?
John Pasalis of Move Smartly wrote an interesting article recently regarding factors that contribute to the appreciation of condo resale prices over time. He argues that the two primary factors you need to consider is “the balance between the supply of condos in the resale market today and the demand for those condos in that neighbourhood.” Pasalis uses the following explanation to make his point clear:
“For example, imagine you’re considering buying a condo in two different neighbourhoods and in both neighbourhoods roughly ten condos per month are available for sale. Now suppose in neighbourhood A only one condo actually sells each month and in neighbourhood B five condos sell each month. Clearly the market for condos in neighbourhood B is far more competitive than in neighbourhood A… It makes sense then that condo prices over time will appreciate at a faster rate in neighbourhood B where 50% of available condos are selling every month compared to just 10% in neighbourhood A.”
Based on the calculation of “SI Ratio” (sales-to-inventory ratio), one can easily predict which neighbourhoods in the city of Toronto will have the fastest price appreciation for condos. Based on his calculations, the demand for condos in Davisville, the Bay Street Corridor and Agincourt is very high relative to the number of condos available for sale in those neighbourhoods, versus condos in Humber Bay and Bayview Village, which are relatively balanced for June.
Another explanation for condo price growth was presented by the President of the Toronto Real Estate Board. TREB recently released a quarterly sales report for Q2 2015, which stated that there were 7,656 condo transactions from April to June of this year, representing a growth rate of 17% when compared to the second quarter of 2014. Mark McLean, President of the Toronto Real Estate Board, had this to say in a news release:
“Much of the new condominium apartment inventory that has been brought to bear on the market in the recent past has been absorbed.”
So has the issue of overstocked condo inventory actually been solved as McLean claims it has? According to the same TREB report, condo sales made up 70% of all home sales in the GTA in the first half of this year, with average sales prices rising by about 6% since this point last year, now sitting at $416,728.