Condo Risks for Investors. Careful not to get Burned.

Condo risk bubbles up | Economy | News | Financial Post:

According to the Canada Mortgage and Housing Corporation and the Financial Post, housing starts in Canada continue to rise. A huge disconnect, however, has now developed between single family and multi-unit buildings. Condo and multi-unit construction is up over 17% this year, while construction of detached homes has started to fall-off, declining by over 12%.

According to the law of supply and demand, increased supply for condominiums in Toronto and Vancouver, without a requisite demand from new buyers, will undoubtedly result in a price drop for new units in the area. Detached homes, however, may experience a more elongated rise in prices, or at least a more cushioned fall, should prices decline across the board during a down-turn in the economic cycle because construction of them has largely slowed.

“The multi side of the market certainly looks more at risk given the supply situation,” he said. “Prices have been pretty resilient so far, but the concern is if we do get a correction in prices the fact that the supply of condos is looking so much more ample, those will be more at risk. Singles are actually looking pretty tight be historical standards.” (Financial Post).

Both the Royal Bank and the Bank of Montreal have now expressed warnings about an overheated condominium market in Canada's major population centres. Special attention should be paid to "investor-owned" condominium properties. This is because market rents have to be commensurate with the cost to carry the mortgage on over-inflated property prices. Should prices fall, and rent not cover the mortgage, this will be a double edged sword for investors. They could lose money as the sale price of their condo falls, but they could also lose money trying to carry a mortgage on a property that cannot be rented out.

For those who live in their units, the risk is much lower, as there is no imminent need to sell or realize a positive cash-flow from the units, they simply have to wait out the market in their primary residence.

Point of advice: Be wary of buying a metropolitan condominium as an investment property in the current market. A number of warning signs indicate that you might get burned.