“Economists will tell you that one of their biggest challenges is figuring out why Canadians still gather in long lines for a chance to buy a condo in a major city even as the economy deteriorates and the housing market looks more and more wobbly.
To the development industry, the answer is simple: The population is expected to continue to grow and as long as it does, demand for living space, such as condos, will move up as well. On top of that you’ve got the foreign investors, especially from Asia, arriving in significant numbers in search of a safe place to stash their money.
Admittedly, there’s a degree of logic to that — prices are going up because demand is going up. But those in search of more detail have been left scratching their heads. How many Toronto condos were bought by foreigners in the last year? What proportion of units are purchased as investment properties? How big a role in the market does CMHC insurance play? Nobody seems to know.”
“Enter Ohad Lederer, an analyst at Veritas Investment Research, a Toronto-based provider of independent analysis to the investment industry. Like many others, Mr. Lederer was surprised by the extraordinary growth of the condo industry and wanted to understand it better. But instead of setting off on a wild-goose chase for non-existent numbers, he took a different approach, examining some of the basic assumptions about the market. The project included mystery shoppers dispatched to a couple of downtown Toronto sales offices. Mr. Lederer comes to some some interesting conclusions.
“We believe that buyers in the current condo market exude hope over experience,” he said in the report, adding that despite claims of a buoyant rental market investors are ending up with “an astonishingly low return on invested capital.”
- from ‘Condo market driven by easy credit and faulty math: analyst’, John Greenwood, Financial Post, 1 Nov 2012 [hat-tip allen]
The buyers are all speculators, buying on the assumption that RE prices will continue upwards at 7%+ per annum.