Toronto: Budget cuts amidst the condo boom

Benj Gallander and Ben Stadelmann
Tuesday, April 24, 2012

When tourists with little knowledge of Toronto arrive, they must surmise that the city is flourishing. Cranes fill the downtown landscape as “Condomania” stimulates growth. In fact, this city is party to a craze whereby more than double the number of condos are being built here than in any other city in the world.

Obviously those take a heap of money to erect. Yet somehow, amidst the riches this is creating, the city is having trouble making ends meet. How ironic! The cutbacks made or proposed by city council are legion, many of them impacting programs that encourage children to exercise, play and learn.

Municipal measures ranged from charging additional fees for using sports fields (since retracted), to closing swimming pools and community centres, to cutting libraries and reducing their hours. Why not just throw the youngsters into the street and let them exercise and kill time by dodging traffic?

Part of the tragedy is the tally of the money saved. Often it is a couple of million dollars here or there, a mere pittance in the city’s $10 billion budget. Surely there must be better ways to make the books balance.

While the city is penny-pinching in the wrong directions, real estate prices remain on a firm uptrend, increasing 10 percent year over year. Bidding wars for properties are again the rage, and prices for homes seem ludicrously high. Places in need of major renovations and teardowns in desirable areas go for better than half a million bucks, as customers line up to get in on a market that they feel is running away from them. Frenzy? Mania? You can bet your sweet bippy on that.

One concern is whether or not we will suffer the same real estate meltdown as occurred in the United States. Most pundits suggest this is not possible and choose to ignore the early and mid-1990s as a refresher course when Canadian real estate prices did careen downwards. While recognizing that interest rates could go up, they ignore the huge negative ramifications this will likely have with even a return to historical norms — which would place rates a number of points above where they are now.

With our nation’s people becoming debt heavier, an increase in rates will surely lead to a rash of people who can no longer feed the mortgage mill and ultimately will be forced from their homes by both friendly and surly bankers, arguably doing their jobs. That will lead to prices heading downward —the question is how much?

So what about investing in Toronto real estate now? Or Vancouver, for that matter? We feel that this has turned into a mug’s game and those who purchase houses or condos at the top will rue the day they bought. Housing prices move in cycles, there will be better prices for buyers on the next down leg.

The tremendous amount of building in T.O. and the increasing heights to which towers stretch makes one wonder who is in charge. Certainly, city council seems secondary, and it appears that developers and the Ontario Municipal Board are in control. That is leading to a haphazard approach, running roughshod over limits set by city planners.

And while a city like Chicago has done beautiful work so that citizens can enjoy the waterfront, Torontonians can barely see it anymore with all the edifices blocking the way. How sad that these beautiful vistas have been claimed by the few at the expense of the many.

While our market seems overheated, properties in the United States still appear cheap. Those Canadians pursuing the snowbird lifestyle can find bargains aplenty in Arizona, Florida and Vegas. There are lots of good buys in parts of the US that may be less obvious. For example, there is promising upside for those willing to park money in Buffalo or Michigan real estate.

For more passive investors, US real estate companies could potentially offer excellent returns. Our Stock Watch List includes Beazer Homes USA and Standard Pacific. Both of these are well off their lows, reducing the upside, but certainly their risk of filing Chapter 11 has diminished, decreasing the downside.

Meanwhile, back home the city operates an agency delightfully called Build Toronto. Sadly, it looks more like “Sell off Toronto.” To reduce the city’s debt, the city is holding a virtual garage sale of its real estate assets.

As horse and stock traders know, it is better to sell from a position of strength than weakness, which is the city’s current lot because the desperation for money is evident. In addition, Toronto has decided to participate in condo growth, joining forces with a major developer.

This appears to be a contrary indicator; if the powers that occupy city hall feel they can make some easy money, it is more likely that the market is about to turn.

Toronto will continue to grow, and there will be ongoing demand for real estate. Over the longer term, prices will increase. But our feeling is that it is wise to delay home and condo purchases at this time, especially during the high tide of spring, as it is indeed a sellers’ market. In the meantime, we will puzzle over how the City of Toronto can be in such poor financial shape while real estate is booming.