Should you buy what foreign buyers purchase?

Despite the introduction of a non-resident speculators tax in Ontario in 2017, people still talk about foreign investors “buying up all the condos” – which just isn’t true. According to the latest data release from Canada Mortgage and Housing Corp., non-residents of Canada owned just 2.6 per cent of condominium units in the Toronto Census Metropolitan Area in 2020, down from 2.9 per cent in 2019.

When looking at Toronto described as the “centre” by CMHC, the rate is 4.1 per cent, less than downtown Montreal.

I had long contended that offshore buyers made up five to 10 per cent of new pre-construction condominium sales, and CMHC data showed that condo buildings built since 2010 in the CMA have a non-resident ownership rate of 4.7 per cent. Most people don’t realize that investors, either domestic or foreign, have been very positive for the new Toronto highrise market, as they bridge the long gap between launch and occupancy in the market, and help bring on new rental supply.

Plenty of demand

In a recent episode of the Toronto Under Construction podcast, Gavin Cheung, the president of developer CentreCourt, indicated that the company doesn’t need to go overseas to covet buyers; there is plenty of domestic demand for its projects, which tend to sell out in less than a month.

A couple years back, I took a course on Global Real Estate Trends at MIT’s Centre for Real Estate in Boston. One of the lectures by my professor (who has a PhD in economics from Harvard), mentioned tips for understanding real estate markets. Two that stuck out were: Markets tend to misprice assets in marginal locations (leading to overpricing and over-construction); and the best bet are core assets with high locational premiums. This is how many foreign investors perceive the Toronto condominium market, and perhaps it’s a good way for you to look at the market, too. Forget cheaper marginal locations – buy core assets (which of course, may be easier said than done, given recent price growth).

Great locations remain great locations, and there is no guarantee that a good location will become a great location, so many foreign investors stick with great locations, because they know they’ll retain their values. These areas are also often the quickest to recover when a market experiences a correction (see the New York and San Francisco downtown condo markets, post-global financing crisis). Anecdotal evidence from rental apartment developers in Chicago showed that their leasing has exploded recently, as tenants really want to be back downtown in the post-COVID environment.

People have long been saying that too many condos are being built, young folks don’t really want to live in highrise buildings, and that investors would run for the hills as soon as the market showed even the smallest sign of a price correction. None of these dire predictions have even come close to occurring. In fact, investors remain bullish on the Toronto condominium market despite the 2017 correction in resale housing values. Data from rentals.ca showed a massive decline in downtown Toronto rental rates for condo investors, but most stuck it out. Pricing began to resurge in December 2020, as people were enticed to “buy the dip,” as they say.

Flood of immigration

As construction costs skyrocket, government fees are loaded on and land availability shrinks, there will be fewer downtown Toronto condos for sale over the next 10 years. We all know what happens when there is less supply. When the borders reopen, expect a flood of immigration again, further boosting demand.

Many foreign and domestic investors have made a fortune betting on the urbanization of Toronto, and the desire for people to live in dense communities with ample amenities. Buying real estate in great locations is a very long-standing investment strategy for many wealthy individuals and corporations across the globe.

Foreign buyers love downtown mixed-use highrise projects within walking distance of transit and employment. They know that these communities will continue to be the most desirable places to live and, as crazy as it sounds, a $1,400 per-sq.-ft. condo will seem like a ridiculously low price 15 years from now.