Lost Causes

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Yesterday’s pathetic blog posting brought this response from a condo-humping site in Toronto. Actually, I like TrueCondos.com. It’s pretty good house porn. Realtor Andrew la Fleur has not only a romantic name, but a fluid writing style, while being both a relentless media hound and a great comedian. His bio says, “I am not a salesman. I am not here to sell you anything.” What a fun guy. Check out how he’s selling the latest condo assignment.

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Speaking of assignments – the clause would-be flippers use to dump a pre-build condo on the next greater fool – Andrew devoted a thousand words of valuable pornographic space to trashing me. Now this is interesting in its own right, since the best strategy is always to ignore me. Like a cold sore or jock itch, I’ll eventually fade away. Just ask the prime minister.

But by choosing to counter my comments on the imminent risk specuvestors pose to condos, and by extension the entire regional housing market, he simply acknowledges my arguments matter. Unsmart, Agent Flower. You’re the patron realtor of lost causes.

When eight of ten new condos have been bought by speckers and flippers – hopped up on leverage and expecting fat, easy gains – and not end users, this is a market teeming with risk. Combine that with rampant, unsustainable overbuilding and the credit crunch created by the latest mortgage rules, and the outcome is inevitable: Condos have earned a place in the Bre-X Hall of Fame. Pity all those people who bought in exactly when they should have been running, screaming.

Well, Agent Flower wrote that my post yesterday screwed up in several areas. He has some good points, but not many. For example, I asserted that “units can be secured for just 5% down, with modest additional amounts due over the next year.” He said, “the truth is you need at least 15-25% deposits.”

Not exactly. It’s true developers need to substantially sell out a project and collect sizable downpayments in order to get financing (which has just become far harder to obtain). But that’s in no way prevented the offering of easy payments and minimal deposits. For example, a typical payment schedule would be $5,000 on signing, an equal amount in 30 days, then 5% more in three months and another 5% six months later. And, of course, you can put it all on your line of credit.

And how about the danger inherent in a market where supply and demand are suddenly badly aligned? Mr. Condo has this to say: “Prices will not fall unless sellers get desperate and start lowering their prices.” As deep as that may sound, it pretty much describes the current situation. Take a gander at realtor.ca and count the little red dots in downtown Toronto, for example. Over 6,500 resale condos on MLS in the GTA, with more than 500 in the core alone (and how many more on Craigslist?). Track them for a few weeks, and come to your own conclusions. Prices are falling weekly because sellers are indeed desperate.

As for new condo sales, we already know they’ve cascaded lower. The last speckers in are screwed.

By the way, those poor souls who cannot wiggle out of their pre-sale deals and end up actually closing on a box in the sky must then find a tenant. I said, “Nobody can make money as a landlord at $700 a square foot.” Agent Flower says, “People will make money on $700PSF. Just give it time. Heck, some are already making money at $700PSF if they bought the right type of unit in the right location!”

Hmmm. A 700-foot unit selling for $490,000 with 20% down costs $1,900 in financing (3.2% VRM) and at least $600 in condo fees and property tax. That’s $2,500. Then figure out what the $98,000 down payment could be making at 7%, which is $570 a month. Presto! A condo anybody can rent for $1,800 carries for more than $3,000. This is what condo-flogging and selling assignments does to your brain, kids. Stick with drinking endless cans of Monster.

Finally, it should be noted that yesterday I wrote, “Flippers have effectively ridden real estate higher, increasing prices through an undocumented yet powerful shadow market that could account for up to 15,000 sales a year in Toronto alone.” Agent F says, “there is no way that there are anything close to 15,000 assignment sales in Toronto each year.”

Of course not. I said flippers – investors – not assignment sales. I guess it’s hard to read clearly when you’re foaming so much.

But anyone’s free to shred whatever I say and write. God knows there is enough material. Of course, some condos are spectacular, especially when their glass balconies explode in the sun. Plus, lots of people made great money selling their units to others who will long regret it.

Behind every one of these special moments was a realtor. But remember, they’re not selling anything. Honest.

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avatarGarth Turner - The Greater Fool posted Friday, November 16th, 2012.

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