Toronto

A Third of Toronto Condo Buyers Might End Up Paying Double The Sticker Price

A Third of Toronto Condo Buyers Might End Up Paying Double The Sticker Price

Low interest rates have flooded the Toronto real estate market with cheap credit, but not everyone is benefiting from it. Numbers from CIBC Economics (thanks Tal and the gang!), show many owners that are occupying a new condo they took possession of in 2017, are paying huge mortgage rates. If this segment of buyer pays the same rate for the full length of the mortgage, they will have paid more in interest than they paid for the condo.

A Lot of Toronto Buyers Are Poorer Than They Think

Despite near record low rates, a lot of new condo buyers aren’t getting deals from their lenders. According to CIBC, only 15.7% of borrowers that took possession of a new condo in 2017 are paying less than 2.5% interest. The majority, 55.6%, are paying more than that, but less than 6%. Still, a massive 30.6% of these borrowers, are paying above 6%. Of those paying more than 6%, a mind boggling 17.4% of borrowers are paying over 9%. Seriously? WTF.

Better Dwelling. Source: Urbanation, Teranet, CIBC Economics.

The Higher The Interest Rate, The Harder It Is To Make Money

Buying a home to occupy, is much harder to make money on if you’re borrowing at a higher rate. To illustrate this, let’s run some numbers on a benchmark condo, bought at the end of 2017. The borrower in this example is making a downpayment of 20% for a conventional mortgage, with a 25 year amortization, and they’ll pay a constant rate. We’ll only consider the Realtor commission. No property taxes, maintenance, or transfer fees. It’s a generous world we’re doing the math in, but let’s see how much a benchmark condo would have to sell for in order to breakeven on just interest and commissions by year.

Source: Better Dwelling, Canadian Real Estate Association.

The jump in interest paid is really emphasized when you run it as one giant number. If you only paid 2% interest, you would only need prices to increase 28.89% over 25 years in order to breakeven on just interest and commission. That’s not all that much of a stretch. If you’re above 9%, like 17.4% of last year’s new condo buyers, it gets much tougher. At 9.5%, you would need prices to increase 135.4%, just to break even on interest and commission. At the higher rate, you would need to make over a 100 points more to profit, than the lower rate.

Source: Better Dwelling, Canadian Real Estate Association.

Remember, this assumes interest rates are static throughout your borrowing period. Over the past 25 years, since the last correction, they have been trending lower and lower, until we reached nearly the bottom. Odds are stacked in favor of these becoming higher in the future, not lower. We don’t exactly have 25 years worth of room to cut rates.

None of this means Toronto condos won’t make that increase. It just means you might want to consider shopping around and/or improving your borrowing profile to make sure your lender doesn’t make more than you do.

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49 Comments

  • Reply
    EC 2 months ago

    Why are 50% of condo buyers who bought in 2017 paying interest rates in the 6%-9%?

    • Reply
      Ian 2 months ago

      The chart says only 11.2% are in that range. 55.6% are between 2.5% and 6%.

      The bigger question is why are 17.4% of buyers paying more than 9%? You have to be a *really* poorly qualified borrower to pay that premium. Even a near-prime borrower that gets rejected from a Big Six wouldn’t pay that normally.

    • Reply
      CS 2 months ago

      Because 50% of condo buyers are subprime…

      And they are most likely the same people who caused consumer proposals to rise, right at the same time as mortgage arrears dropped….

      People keep kicking this can further and further down the road, and interest rates are going to go up.

      This is not good news.

  • Reply
    Ian 2 months ago

    Above 9% for a primary home? Sounds like we have more subprime borrowers than the government wants to let on.

  • Reply
    Serg 2 months ago

    If someone pays 9%, this is crazy. Those are speculators and they wont hold it for 25 years. But in general I think you forgot one very important piece of information in your “breakeven” analysis: when you buy condo to live in it, you are not paying rent. So if you sell in 25 years at “breakeven” price then it’s like having free rent for 25 years. 25 years of free rent is super great deal if you asked me.

    • Reply
      Obi 2 months ago

      The NYSE returns an average of 11% per year, over nearly any 25 year period (including crashes). If you invested the downpayment ($96,000), and nothing else, you would end up with $1,304,204 after 25 years.

      Free rent is cool, but I’m sure you can pay a little rent with the other $1,058,000 million you would spend on interest and principal payments after the downpayment. 😉

      • Reply
        Serg 2 months ago

        NYSE and NASDAQ are also in big bubble now. 11% is not sustainable and will crash as well. And probably at the same time as housing.

        • Reply
          Obi 2 months ago

          Includes crashes at 11%. It’s a fucking beast, as long as you buy and sell peak, and not buy at peak, sell at trough, buy at peak, sell at trough, like most people do.

          • Serg 2 months ago

            Real estate is the same beast as long as you buy/sell at right time

        • Reply
          Alistair McLaughlin 2 months ago

          Indeed, there is almost nothing that isn’t in a bubble right now.

    • Reply
      Alistair McLaughlin 2 months ago

      Condo fees. Property taxes. Special assessments. Interior maintenance not covered by your fees (appliance repair & replacement for example). Rent-free doesn’t mean expense-free. If you’re arguing for a more comprehensive accounting of life-time expenses, then you must include those considerable (and escalating) expenses that will continue long after the mortgage is paid off. Condo fees don’t get cheaper as a building gets older, that’s for sure.

      • Reply
        Joe 2 months ago

        Add taxes too. 20% down on a $650 condo, may have $2,600 monthly mortgage, plus $300 taxes monthly, plus $400 a month in homeowner association fees, plus maintenance… may bring it all to about $3500 a month.

        Rent for that place may be between $1800 to $2500 a month

    • Reply
      KP 2 months ago

      Yes but Renting is cheaper than purchasing a condo at these prices. All Most landlords are cashflow negative at these prices. Given slow growth of wage increases, Not only can the rental community not afford these insane purchase prices, but also cant afford rising rents, That will put a cap on rent. This is a Train Wreck in slo-mo!

  • Reply
    Mica 2 months ago

    Put it this way. If you bought a $480,000 condo at 9.5%, it looks like you would pay $686,000 in just interest and commissions.

    Interest and commissions work out to $2,286/month alone. Add another $300/month for maintenance, and $200/month for taxes (both will go up). That’s without lawyers, transfer taxes, and wear and tear you’ll have to pay out of pocket. $90/day… in non-recoverable fees. Is your rent less than $2,786? If so, you’re coming out on top.

    As long as you remember to invest the rest.

  • Reply
    Xelan 2 months ago

    Thanks to the authors for bringing this report again because it’s a really an eye oppener. Hovewer nobody is really planning to pay 6% forewer, all those people are hoping to flip or refinance soon, so calculations for break evens are interesting but have very little practical use.

    • Reply
      Miao 2 months ago

      I agree, they probably don’t *plan* on holding the condo that long if they borrow at 9%. But by 5 years, they will have paid $700,000 for a $400,000 condo? If the rest of prices move that quickly, they won’t be able to upgrade either, because the next rung on the property ladder will be that much higher too.

      I think the more interesting observation here is low interest rates are NOT the only driver. These people are paying a lot of money at very high interest rates.

      • Reply
        Grizzly Gus 2 months ago

        Everything flows from low interest rates. Low rates support asset growth and discourage saving. Prime borrowing households are now able to start bidding up and buying larger properties. Once that growth starts to build, exuberance can take over. Exuberance is what leads to idiots not only over leveraging themselves but also to take on riskier and riskier kinds of debt……….IE higher rate loans from alt/community lenders under the assumption that they will be able to refinance a year or two down the road with a normal bank at a much lower rate. Being able to do this is dependent on house prices growing enough over that time………. Been a good bet the last decade, but prices do not only go up.

        Those who have taken out such debt will be in for a sad surprise when they are not able to refinance, especially if this was for an “investment” property. They will start to liquidate, putting more downward pressure on prices. Those that miss the rush to the exit will now be underwater. This will lead to increases in default rates and bankruptcy, putting more pressure on banks to rise rates to compensate for growing loses. The losses will start with the 9% crowd and then work there way down to the prime borrowers, some of whom will find that they are no underwater and are paying more for their debt servicing.

        Another interesting thought………. how many of those alt/community lenders actually plan or want to finance a single loan for a 25 year period. If the borrowers look at this arrangement as temporary because they can’t afford such rates long term, then don’t the lenders also assume that it will be a short term loan, you know, due to the fact that the person they are lending to would not be able to support the payments over the long term?

        Tick tock

        • Reply
          Xelan 2 months ago

          Grizz, those private lenders don’t usually finance for 25 years, they only finance for a short term, usually 1 year. after 1 year, person either refinance or sell the property.

          This fact perfectly explains why we have 48% renewals this year, because a lot of people are now getting 1 year loans from private lenders.

          If we continue this line on thinking then 2018 will be even worse with more riskier loans taken and that means we may see around 30-40% mortgage renewals again next year so it’s not even worth for BoC to hold off with rate increases this year to protect those people renewing this year.

          • Grizzly Gus 2 months ago

            Yeah my whole point is just that some of those lenders are going to have a really difficult decision.

            Say on a million dollar house, I can borrow 800k from the bank at 3% and then I get the additional 200k from an alt lender at 10%. We both assume that a year from now the value of the home will be 1.2 million, so that I can refinance the 200k loan with a bank at a lower rate. The lender can then go fund a new deal or put their money into something else. A year later the house is only worth 900k. The bank will not allow me to refinance……. What can the alt lender do? They can either refinance the loan and now have their money tied up long term or they can force me to sell. Only problem with me selling is that the bank gets paid out their 800k first. After closing costs (call it 40-50k) how much of that 200k will the alt lender be able to collect? Forcing the home owner to sell guarantees a loss of close to 75% in that scenario. A larger correction only makes it worse.

            As the lender (glad I’m not and won’t have to make these decisions), I think that if you know the borrower has a 0% chance of maintaining their payments over the long run, and prices look like they are continuing to drop I think you would force the sale to recoup as much as possible. If you think maybe they can find a way to keep up with payments then the choice is to risk the last 25% of your investment (loan) and hope that over the long term you are able to make it all back.

            Any alt lenders here that want to share their strategy?

          • Xelan 2 months ago

            I don’t know about that private lending much but what I heard is that they put a lien on the property too.
            That’s why it’s so attractive, if subprime borrower defaults you are entitled to the share of his property.
            It’s sounds like a zero risk that’s why so many people doing that including borrowing from HELOC to lend to someone else.

            Not sure how it plays together if you have another mortgage from a big bank but I believe if you dig through the contracts you will find all answers.

            One of the companies which connect borrowers to private lenders:
            https://fisgard.com/
            You can find more of those if you are interested.

  • Reply
    CondoBillyBob 2 months ago

    They’re probably just counting 2nd mortgages/loans used as downpayments on the 1st (primary) mortgages. Dig deeper..

    • Reply
      Alistair McLaughlin 2 months ago

      As well they should count them. Any number that doesn’t include second mortgages and down payment loans is incomplete and misleading.

    • Reply
      Obi 2 months ago

      Don’t know if you can dig deeper than CIBC/Teranet/Urbanation looking at the actual loans. If you dug deeper, you would probably find those downpayments are bundled through another type of loan, or they’re HELOC’d from mom and dad’s home. The numbers would get worse, not better.

      • Reply
        CondoBillyBob 2 months ago

        I’m just saying the numbers could be skewed. I’d like to see % of dollars mortgaged at >9% versus just % of mortgages.

        If the entirety of these 17% of >9% interest mortgage mortgages are second mortgages, and these second mortgages are around 20% of the total mortgage (1st+2nd combined), then the overall $$ financed at >9% are only 3.4% (20% of 17%), not 17%.

        The chart presenting merely % of mortgages without providing context of $$ value of the mortgages at each rate can therefore (potentially) be deceptively worse than reality.

        • Reply
          Grizzly Gus 2 months ago

          Keep in mind that these numbers are coming from groups that have a very vested interest in the strength of the RE and mortgage markets. They have the real stats, and the people working there are not stupid (greedy, and misleading yes). If your example above were the case I am sure they would have reported on that to ease the fear that our housing market is a sub prime debt fueled ponzi orgy.

          • CondoBillyBob 2 months ago

            You give them more benefit than I do 🙂 If you’re right and they’ve already presented ‘best case’ to prove their thesis, that would imply more dollars are being financed at higher rates than at lower rates. That’s a truly frightening prospect..

          • Xelan 2 months ago

            I agree, dollar values will better help to understand the picture.
            But no matter what the picture is already very very bad.

            People from this report purchased at 2015 preconstruction prices and the numbers are really bad.
            What should we expect from record 36,000 GTA condo preconstruction sales in 2017 whey those condos are build in 2019? You don’t need to answer that question:)

  • Reply
    Al Daimee 2 months ago

    I know some newcomers to Canada arrive with a hefty downpayment, but without the credit history in Canada, they have to take a mortgage (usually for 1-2 years) at much higher rates to build their rating and then they can bring that rate down. Self-employed people also tend to pay higher interest rates, especially if they don’t show a lot of income on their Notice of Assessment (despite actual earnings). Secondary properties and beyond for investment will also pay higher interest rates, especially foreign buyers.

    The pie chart data is just surface level and you need to dig deeper into those in the 6%+ category to understand why they are paying that rate. It would also be interesting to know what the Loan-to-Value (LTV) ratio looks like for those higher rate mortgages.

    • Reply
      Alistair McLaughlin 2 months ago

      You build a credit history by getting a secured credit card with a low limit, then using it for a year or two. Buying a $500,000 box in the sky at 9%+ interest has to be the stupidest, riskiest, most expensive way of building a credit history ever invented.

      • Reply
        CondoBillyBob 2 months ago

        Again I wouldn’t be surprised if this 9% mortgage is on the 20% downpayment, along with a 3% (or so) mortgage on the remaining 80%. The blended rate would be (80% of 3% + 20% of 9%) = combined financing on the unit of 4.2%.

        Does this dataset have a breakdown of dollar value financed for each mortgage? I don’t see that in the report itself (https://www.urbanation.ca/…/Urbanation-CIBC%20Condo%20Investor%20Report.pdf)

        • Reply
          Alistair McLaughlin 2 months ago

          Why the hell would a bank – which just happens to be the most heavily invested in the residential mortgage market among the Big Six – do a survey that makes the market look way worse than it is? There is ZERO incentive for lenders to commission studies that overstate the problem.

      • Reply
        Bluetheimpala 2 months ago

        Come on AM, this is number jockey Al we’re talking about, he needs his narrative like fish need water…it’s like when my nephew says he wants to be a cowboy, I just laugh, shrug and keep on keepin’ on….thanks Al, keep up the good work.

        • Reply
          Grizzly Gus 2 months ago

          Yeah or like how the RE industry points to “peak millennial” demand as a reason why prices can only go up. A study releases today by CIBC shows that 94% of millennials who currently live at home or with familly intend to buy a property in the next five years!!!! WOW……… its just that 67% of them have not started saving yet.

          But who needs savings right Billybob? Get 80% of the loan covered by the bank and then the other 20% covered by your neighborhood loan shark at 9%.

          • John 2 months ago

            #Like

          • CondoBillyBob 2 months ago

            I’m not saying it’s a good idea – I’m nor debating that. I’m just telling you the numbers in that report likely don’t tell you everything. They’re not showing you the average size of the mortgages at each interest band. Guarantee you that the average mortgage at 9% is way smaller than the average mortgage at 3%.

          • Alistair McLaughlin 2 months ago

            Or just get a CMHC-insured loan with 5% down. The bank prefers those anyway, and will reward you with a better rate. Such is our perverse system.

  • Reply
    Xelan 2 months ago

    I found some data today regarding B-20 impact which I’d like to share with you:
    https://www.canadianmortgagetrends.com/2018/04/state-of-mortgage-consumers/

    The article says that the total amount new loan originations in the second quarter is down 7.3% from a year earlier,

    But that’s not all, it also stating that mortgage payments rose by 5% for new mortgages which is a result of interest rate hikes and will definitely contribute to new loan originations.

    Here is the total B-20 impact so far:
    7.3% – 5% = 2.3%

    There are more variables affecting mortgage originations but so far interest rate increases are playing major role which is understandable because that’s the only regulation you can’t cheat.

    • Reply
      Xelan 2 months ago

      On a side note I was really surprised by this stat:
      Mortgage holders aged 35–44 made the highest monthly mortgage payments, averaging $1,323.

      1.3k.. Really? Wondering what’s the average payment for 2017 mortgages? 2,500? Does anyone has this stat?
      And at the same time they say 50% Canadians live paycheck to paycheck.
      We need a crash, otherwise our kids are doomed and will be in debt forever.

    • Reply
      Grizzly Gus 2 months ago

      Keep in mind those numbers are averaged across all of Canada which masks the numbers for households located in the bubble zones.. Even with record low interest rates across the entire country, many regions did not have price appreciation that took household debt to income ratios beyond 3-5. Those regions on average shouldn’t be impacted by B-20 considering that the fall in debt servicing rates was not offset by a large increase in debt to income.

      GTA sales have been down 30-40% YOY so far. I assume this should have resulted in 30-40% less mortgage originations out of the GTA. Considering the GTA makes up about 25% of our total housing market (30% to 40%)/4 = 7.5%- 10% reduction in total new Canadian mortgages.

      • Reply
        Xelan 2 months ago

        Good point. Following your logic I guess interest rates impact should be bigger in Toronto as well.

        As for the sales – they are not really directly related to originations because people may just move/upsize less often which will result in less sales numbers.
        I think it’s better correlated with “Months of inventory” with the value increasing when mortgage originations fail and vice versa but even here it’s not 1:1 ratio because investors may just dump more properties which will increase “Month of inventory” stat.

        So there is no 1 to 1 mapping between originations and other stats. Your math is not entirely correct either but all we can do at this point is guess.

    • Reply
      Alistair McLaughlin 2 months ago

      Those numbers are for the second quarter of 2017, so they are more than a year old now. The stress-testing measures referred to in the article were those the Department of Finance brought in for insured mortgages in October 2016. B20 wasn’t even a twinkle in OSFI’s eye yet.

      • Reply
        Xelan 2 months ago

        Hmm.. thanks for pointing it out. The article itself is fresh so it’s quite weird they decided to analyze such old data.

      • Reply
        Xelan 2 months ago

        So in Q2 2017 we had record amount of sales but mortgage origination fell 7.3% Canada-wide compared to Q2 2016.
        This is mind blowing and I can’t find any logical explanation for that picture.

        • Reply
          Grizzly Gus 2 months ago

          I missed that it was for last year as well. Were sales really up YOY for Q2 though. Thought May and June 2017 were both down YOY.

          If it was record sales vs declining origination I’m guessing it has to be a ton of cash purchases ? Or maybe altlenders don’t show up in the numbers?

          • Xelan 2 months ago

            You are correct, Q2 2017 sales were less than Q2 2016 for both GTA and GVA.
            It makes sense now:)

  • Reply
    Xelan 2 months ago

    I guess we are supposed to talk about Canada here, but I just came across a very interesting stat – Retail rents are crashing 20% YoY in Manhattan.
    https://www.longroom.com/discussion/995630/retail-rents-plunge-20-across-manhattan

    No idea what’s going on there but even in New York real estate may go down at the time when economy is booming.

    Another worrisome trend which is unfolding for a while across the border – subprime auto loans are crashing with delinquencies approaching crisis levels.
    (I can’t past too many links here otherwise my post will be deleted so check yourself if interested)

    So looks like even our strong neighbour may not be as strong as it seems and if it sneezes we know what happens next.

  • Reply
    erik 2 months ago

    this is simply the tip of the iceberg. has anyone read about the chinese money laundering in vancouver? fentenyl profits going through casinos and legitimized in real estate… this is not an isolated problem… its been going on for years …its easy to assume this spilled over to ontario… govts and banks are complicit in the money laundering scheme… how could they not be? there is too much money in it.

    https://www.theglobeandmail.com/news/investigations/real-estate-money-laundering-and-drugs/article38004840/

    https://www.theglobeandmail.com/news/investigations/bc-attorney-general-decries-fentanyl-link-in-globes-money-laundering-investigation/article38014584/

    https://chinawatchcanada.blogspot.ca/2018/02/bc-vows-crackdown-after-globe.html

    https://betterdwelling.com/chinese-gangs-and-canadian-real-estate-the-odd-correlation/

  • Reply
    Beh G. 2 months ago

    There should be a lot of questions about a lot of practices in Canada, particularly in Ontario but Canadians seem to become more passive every day.

    New report suggests that development costs for new homes in Toronto are nearly 1/4 of the price and have almost doubled for condos in just 5 years!

    https://www.bnnbloomberg.ca/government-fees-account-for-nearly-25-of-cost-of-new-toronto-homes-study-says-1.1069051

    What does that mean? That means that when you buy a new $750k condo, you are paying the government a total of $307,500 in HST, LTT and this hidden tax!!!

    That’s right, you just put $75k down on your dream condo but all of that is already gone to taxes and you will be financing another $225k for the next 25 years. Crazy, isn’t it?!

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