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episode # 137

A Tale of Two Markets with Andrew La Fleur

A lot can change in less than a year. Top Producing Pre-Construction Specialist, Realtor, Investor, and Podcast Host Andrew La Fleur checks in with Adam and Matt to discuss the current state of the Toronto market and offers an on-the-ground perspective that’s in contrast to many of today’s headlines. Andrew covers what’s hot and what’s not in Toronto, the best investments, and his tried and true investment strategies. So glad Andrew made our hotline bling (just kidding – we don’t know what that means).

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Episode Summary


 

About Andrew:

Andrew is a real estate agent and pre-construction specialist in Toronto. He is the founder of www.truecondos.com and has specialized in the pre-construction condo market for 12 years. Andrew helps people by showing them the best areas, projects, and units are to make the most money in the long-term. Andrew practices what he preaches and is an investor himself.

On how the Toronto market is doing, currently:

Overall, the headlines are rosy and say how sales and prices are up. They’re now being compared to the very low months of summer 2017 when the market took a big downturn. So, while the market isn’t doing as well as the numbers might suggest overall, it’s not in trouble at all. A big grain of salt should be taken with the numbers. There is a tale of two markets: the low-rise, detached market is very different from the high-rise condo market. Condos doing very well on the low end of the pricing spectrum ($600,000 or below) are getting multiple offers and their prices are rising rapidly. There is a massive lack of supply; it’s a seller’s market. Detached low-rise housing across the region, priced at $1.5 million and up, is not terrible but it’s not great—it’s been fairly slow overall, and it’s continuing.

The entry-level detached market is healthy enough; sales are up 17% year-over-year, and the average price is only up about 1%. The biggest story is how the government has completely distorted the real estate market. With regulations like the stress test and rent control, it’s forcing demand down to a lower level, but the actual demand is huge for the higher-level pricing spectrum. People want to buy but the government isn’t allowing it, so sales numbers are lower than they have been historically. People are having to move down the pricing spectrum and buy cheaper properties – meaning condos.

On the factors driving Toronto’s market, which is busier than Vancouver’s:

Population and job growth are the biggest factors. The economy is doing very well; wages are going up, unemployment is going down, and the population of the Greater Toronto Area is increasing at a very high pace. The Liberals announced they will increase immigration targets across Canada, and we know many of those people will end up in Toronto. As long as these things are happening, the market will continue to plug along. The major challenges are the stress test, mortgage rules, and general affordability (prices are much higher than they were two or three years ago). People in Toronto look to Vancouver and ask if its prices and future are what they can expect, but Vancouver has historically been more expensive. It’s a good reminder that every market is local; different factors affect different markets.

On rental regulation and how it impacts investors in Toronto:

Across Ontario, since last year there has been full rent control but just for inflation (which is currently 1.8%). Any landlord knows their expenses will go up much more than this each year, but especially within the past year just from rising mortgage interest rates. At least in BC, the number is above inflation which helps landlords offset some of their costs. 1.8% is ridiculous, and rent freezes are even worse. There are studies, worldwide, that show rent control does not work. The best antidote to crooked landlords and high rents is not more legislation and control—we need more landlords and competition! Add more rental housing. The supply problem is not being addressed: the process is slow and becomes a disincentive for people to build; we need massive reform in how approvals are done. Everyone seems to talk about the other end of the spectrum, which Andrew feels is useless and a waste of time. Housing is an easy topic to get a lot of votes, as it affects everyone. Canadian policies seem to be made to save money in the short-term, not the long-term.

On whether investors are nervous to get into the market, or if it’s business as usual:

Investors are eager to get in; there are more than ever before. The problem is affordability and finding properties that cash-flow. Two or three years ago, there were multiple options in downtown Toronto for $400,000. That doesn’t get you anything today. Today, $500,000 is the lowest price point, which gets you a small one-bedroom unit. In Toronto people got used to putting 20% down to make a cash-flow condo, but today it takes 30% down. The average downtown condo price per square foot is officially approaching $1,000 in the resale market, and prices are rising rapidly. Prices have gone up about 40% over the last 24 months or so.

On how this compares to the presale market:

Pre-construction, brand new properties have always been priced at a premium compared to resale properties. A myth Andrew hears is how you could buy pre-construction cheaper than resale. That’s just untrue. There has always been a gap. The opportunities as an investor are to find those hidden gems that are priced at or less than resale–these are rare, but great to find. Pre-construction is priced at $1,100-1,200 per square foot on average, meaning a $100-200 per square foot premium over resale.

Land and construction costs are so expensive, so builders can’t make money selling a mid-market product in a mature city. There is no empty land for a reasonable price. People’s expectations will adjust; it may mean people expect to rent, not own, in cities like Toronto and Vancouver – much like in New York or Hong Kong.

On some key indicators Andrew uses to analyze and approach an investment opportunity:

The main thing is every opportunity must be evaluated on its own merits. People are looking for the “magic bullet” for guaranteed success. It’s not that much of a science, unfortunately—it’s also part art. There are so many instances of people doing well but investments haven’t checked off boxes that experts dictate. Look for hidden value opportunities that others might overlook; for instance, pre-construction at or below current resale values. These are getting harder and harder to find. Rental rates haven’t risen at the same level as purchase prices. However, the great thing about pre-construction is you buy at today’s prices but rent out at future prices much higher than today’s, as completion will likely be four years down the road. A lot of it comes down to understanding the market overall and the factors of what makes a building successful – even the subtle differences of those across the street from one another.

On an area Andrew is excited about:

There is lots of growth potential on the east side of downtown. One to watch over the next five to 10 years is a development called East Harbour, on the east side of the Don River. It’s a massive commercial development with office towers. As many as 50,000 jobs could be in this area, almost like a second financial district. Regent Park in the downtown east continues to be a great area to invest in. There are great areas outside of Toronto as well, such as downtown Hamilton and Kitchener. Downtown Ottawa is great, too.

On Andrew’s advice to those who are very bearish on Toronto’s market and those calling for major corrections:

Andrew doesn’t spend much time speaking to this segment of the population; they’re likely not listening to this podcast, anyway. He’s interested in talking to people who understand that real estate is a long-term investment and gain. There will always be ups and downs, of course; things won’t always go up forever. It’s all white noise that will distract you from what you should do: get into the market and stay there for as long as possible. Real estate is not a stock or equity; it’s a buy-and-hold, long-term approach. Think in terms of decades. Don’t overcomplicate it.

To get in touch with Andrew, go to www.truecondos.com and subscribe to Andrew’s weekly email. He also has a podcast there or on iTunes.

 

King project in Toronto by Westbank:

 

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