Desperado

A new bank report confirms what we’ve told you for a while. Condos are like boats – holes in the water where you throw money. They’re in oversupply. Losing equity and value. Yielding negative cash flow for investors. With ownership costs that have only one direction which to travel.

What a disaster. Ask Janice.

Two years ago she bought a one-bedder condo (actually more like a big closet, at 440 square feet) in East Van, in a 38-story building near Boundary Road, across from a SkyTrain station. Nice location. Big price. It came new from a developer, who actually furnished the mortgage.

Janice paid a little less than seven hundred. Plus tax it came to $729,750, with financing of just under $600,000. Now it’s killing her. The mortgage rate is 9% (not uncommon for a loan from a non-bank lender), and she still owes $580,000. Desperately, Janice is trying to get conventional financing so the interest charges can be slashed.

She went to Scotiabank. They arranged an appraisal.

Oh dear.

The detailed report (23 pages) examined the unit, the building, the hood and comparables. With regard to current value, this was the conclusion:

These five comparables sales are considered to be the most similar to the subject property. Note: comparables 4 & 5 are dated sales in the subject complex. Note: comparable 6 is an active listing in the subject complex. The adjusted value range is from $537,000 to $569,000. The final appraised value is $560,000.

Gulp. A loss of 23% in two years. If Janice were to sell, paying commission, it would be even greater. Worse, with a mortgage larger than the total value of the property she’s underwater. No equity. Nothing to borrow against in order to refinance.

Grasping for help, she reached out to local mortgage guy Mark Fidgett. “She was referred to me with the hope that I might be able to help, as I provide equity financing,” he tells me. “However, her current mortgage is with the developer and with her being underwater, there’s nothing I can do. The payments are clearly unsustainable at that rate. She hoped to move to a bank mortgage through Scotia, but aside from income ratios, the loan-to-value alone makes it impossible, with $580K owed on a property appraised at $560K.”

Of course, a lot of this is her fault. She bought a shoebox. She paid too much. She borrowed from the wrong source. She agreed to a bad mortgage. And she obviously made a lousy, emotional investment – losing a quarter of her equity, all of her downpayment, and being saddled with finance charges plus property tax and strata fees ($640 monthly).

The building in East Vancouver – a 23% equity tumble in two years.

.

Says the sympathetic mortgage broker: “Not sure what the market was when she bought, but any realtor pushing a 440 square foot condo, 1 bedroom + den (seriously), not even in the downtown core, at $1,660 per foot needs to have their head examined.”

Well, she’s pooched.

So are tens of thousands of amateur landlords who thought it would be a no-lose move to buy a rental unit (or three). Now most of them are in negative cash flow (in Toronto the proportion is about 70%) with units that are losing value monthly while more supply streams onto the market and silly governments move to coddle tenants from economic reality. Those renters who stop paying are not being tossed, while landlords needing to renovate or occupy their own units are slapped down.

In Toronto, where over 17,000 new and unsold units are about to be joined by thousands of fresh completions, the resale inventory of condos has exploded by 64%. Investors are selling. Owners unable to sustain more equity loss are bailing, as are those coming up to a mortgage renewal and realizing how much better they would have been with a lease.

As for condo investors, TD economist Rishi Sondhi’s latest analysis says most of them would have been better off buying boring, unsexy fixed income. “The relatively elevated interest rate backdrop means that the gap between the rate of return from a condo in the GTA … and from a risk-free’ government bond has narrowed.” Throw in come growth assets, like equity ETFs, and a B+D portfolio has vastly eclipsed the performance of investment residential real estate – where capital gains have turned into losses.

Regret. Everywhere.

We told you this was coming. And still we’re pushing home ownership on the kids. Shame on us all.

About the picture: “Introducing our new Brussels Griffon – Bruno,” writes Elsbeth, in Toronto. “Named because he looks like a bear cub. Now aged 10 weeks he is busy as I type this chewing on my toes, having surgically removed both my slippers and my socks. We sadly lost our original Griffon Galileo, who you featured a few times, to liver cancer age 9. This is his grandson and just as nuts as his grandfather. A house just doesn’t feel right without a dog in it.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/09/11/desperado-2/