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Re-Thinking Pre-Construction Investment in Toronto Real Estate

Re-Thinking Pre-Construction Investment in Toronto Real Estate

Aug 17, 2017
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The Toronto real-estate market has changed rapidly over the last three years. In August of 2014, the average PSF for Toronto condos was $428, or $299,600 for a 700sqft condo. Today, the average Toronto condo PSF is up roughly 50% to $656.*

Month by month, the Toronto condo market has been absorbing the displaced demand for resale freehold houses, pushing buyers from one marketplace to the next. As affordability shifts, have pre-construction opportunities become the new entry-point into Toronto real estate?

Pre-construction investment has changed in Toronto

In the past, Canadian buyers tended to steer clear of pre-construction projects because of misunderstood price discrepancies. Pre-construction on average costs 10% more than resale condos , causing many buyers to scoff at the opportunity that seems unjustly overpriced. The higher price, however, is a premium for a future market value, as the trends to in the neighbourhood suggest.

Take for example X2 Condos in the Bloor and Yonge neighbourhood versus the recent pre-construction project Via Bloor . Resale prices at X2 Condos have already caught up to the pre-con pricing of Via Bloor, which was opened to buyers earlier this year. While those buyers paid a premium for the project, their investment takes into consideration the expected price growth within the neighbourhood over the next few years, typically three to five, until completion.

The higher premium on pre-construction developments is also due to buyer specifics. Getting into a pre-con investment affords you greater selectivity than resale, as you can lock in the neighbourhood you want, the exact unit, and even some of the unit design features. It’s a plan for your future that costs a little extra.

Since all market prices have risen in Toronto, pre-construction projects are offering an opportunity for more people to get into real estate, removing traditional barriers of entry. For investors and first-time buyers alike, especially those seeking a primary residence, pre-con is becoming an affordable option compared to re-sale.

The affordable side of pre-construction investment

Pre-construction developments often have tiered payment options that bypass the traditional entry barriers for keep first-time buyers in resale market. The purchase of a pre-con condo can be paid out over an extended period, effectively diminishing the overall price.

Instead of dropping 20-25% down payment all at once, pre-con projects allow smaller distribution payments over a year, making it easier and more manageable for buyers to afford the down payment.

Let’s say the condo costs $600,000 – with 20% down payment paid over 1 to 2 years in monthly deposits. When applying for a mortgage, the 20% down payment acts immediately as a deduction on your total mortgage carrying costs, roughly $480k, but you have 1-2 years to pay the down payment.

For a working professional saving 25k a year, who may not be able to drop 20% right away, having the option to pay 5% right now, then 5% in another 60-90 days, and so on, will make a 120k down payment more attainable over time.

For a prospective buyer who is currently renting but would like to own property in the future, a pre-construction opportunity is a manageable entry-point into the real estate market, starting with a Toronto condo.

Pre-construction investment and the future

The future of real estate development in Toronto is vertical living. The allotments of land are getting smaller, and so buildings are growing in the only direction available—up. There is a push for greater urban density, making the condo living lifestyle the norm, even for families.

Mass media loves to attack the big developers – sometimes rightly so – but one thing that comes from density is change – CityPlace is a great example. Once nothing but a railway yard, there will now be homes, parks, schools, shops, and more. Investing in pre-construction development in Toronto is investing in Toronto’s future, because the city is heading in that way like it or not.

Even moving outwards from Toronto’s downtown core to Etobicoke, Mississauga, North York, or Kingston Road in the East End, vertical development is on the rise. Transit development is crucial, connecting more residential areas to commercial centres in the city. Beginning with the new Vaughan extension to the TTC’s Line 1, these areas are going to see massive development as the infrastructure expands.

Looking beyond Toronto to the communities of the Greater Golden Horseshoe, smaller towns across Southwestern Ontario are turning to vertical development as well. New developments are revitalizing older communities, or otherwise creating the communities from scratch, such as South Bay in Kingston’s waterfront community, or the proposed re-development of South Works in Cambridge, ON, into the Gaslight District similar to Toronto’s Distillery District. With a mind on pre-construction, you will be looking beyond Toronto to find real opportunity in flourishing towns where new buyers bring businesses, culture, and community.

Development is not at all bound by the Greenbelt as people argue. The push for vertical living is making people think creatively and new infrastructure in residential areas are getting ready to boom.

*Data sourced via Market Index, August 17, 2017