Sunday, July 19, 2009 3 comments

Yonge-Bloor condo project in Toronto blows up...start of a trend? Or not?

Borat fans may have a field day with this but let's keep it serious...From The Star:

The gleaming 80-storey condominium tower that was to lead the revitalization of the Yonge-Bloor intersection in Toronto is teetering on the edge of extinction.

On Monday, the Toronto lender that advanced a $46 million loan is going to ask a court to put the Kazakhstan-backed project into receivership and sell off the now-vacant land its international developer boasts is the "best address in the world."

The lender, a consortium of Toronto businessmen, alleges in court documents that Kazakh developer Bazis International has defaulted on its land loan and the Kazakh bank backing the tower portion of the project is involved in a "massive financial scandal involving fake loans, racketeering and money laundering activities."

"The (land) loan has been in an almost constant state of default since December of 2008," said Toronto consortium leader Gary Berman, in a court affidavit supporting his group's bid to appoint receiver Ernst &Young.

Berman states in the affidavit that his group wants its loan repaid, or they are willing to purchase the property in a court-approved sale.


I'm not sure if this is the start of a real estate bust in Toronto, or whether it is simply an isolated case. One the one hand, the development seems to have collapsed due to the raketerring and money laundering scandal with the Kazakhstan bank (admittedly, it's possible that the government in Kazakhstan, which is closer to corrupt than anything, is just levying every accusation it could think of.) If it is solely a Kazakh bank problem then it may have nothing to with the nature of real estate in Toronto.

On the other hand, this is a prime location in Toronto. You are basically at the center of downtown, with the entertainment district a few streets away, shopping all around, the elite Yorkville nearby, and the financial district just a few subway stations away. The fact that they are having problems financing such a glamorous project implies that we may indeed be facing a real estate bust, at least in condominiums. The developer seems to have reduced the building from 80 floors to 67 floors—that alone indicates a softening market.

It's too early to draw conclusions but I'm bearish on condominiums in Toronto. I don't follow them and I can't afford them so this is just a wild guess. I have held that view for several years now and been wrong so far (actually prices started declining already I believe but it isn't a big correction per se.)

A lot of Canadians don't realize that the real estate market in Canada also rose quite a bit in the last decade and is vulnerable to a bust. We didn't have the subprime and Alt-A—liar loans and NINJA loans being the worst—problems like the US but Canadian debt levels seem similar to the US from some numbers I looked at an year ago. Detached homes may be fine in Toronto but I have a bad feeling about condos. There have been so many built in the last decade, with almost every single one out of reach for low-middle-class and working class—you literally have to be a professional with high salary or willing to leverage yourself. Although this Yonge-Bloor development is elite and on the high-end, you can get an idea by observing prices: $500,000 to $8 million per unit (places like New York and California have very high income so a place for $500,000 may be typical in California; but Toronto, like most of Canada, has much lower income levels so $500k in Toronto is quite a bit.) During the current meltdown, the high-income earners have been hit harder than usual—it's similar to the Great Depression—and I can see the market coming under severe pressure if people can't afford these condos.

From my limited impression, prices in Toronto haven't gone up that much compared to western Canada. I suspect places like Calgary and Vancouver (maybe after the Olympics) may see a greater decline than Toronto. Another thing is that, from an article I once read, although condo prices have not gone up much in Toronto, it is masking the fact that space/size has declined over the decade. Supposedly, developers are squeezing more units and the cost per square feet has risen. I have no idea if this is necessarily bearish. Condo buyers may not alter their pricing based on this change in area. Humans aren't rational at all times (For instance, using an unrelated example, many make decisions based on nominal prices even though real prices are what matter.)


(Incidentally, the Toronto International Film Festival is also moving to a new tower and, although that project has started, it remains to be seen if there are some negative surpises.)

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3 Response to Yonge-Bloor condo project in Toronto blows up...start of a trend? Or not?

Daniel M. Ryan
July 19, 2009 at 10:23 PM

You write as if you live in Toronto. I do, and I've noticed the same condo-building frenzy that you have. [Hell, I have to go to Yonge & Bloor to visit the cage of the discount broker I deal with.]

There's one aspect to the condo boom that I should bring up. The recent environmentalist-driven by-laws have landed most harshly on owners of single-family homes. Condo dwellers don't have to bother all that much with those restrictions, as the management company takes care of things. 

Two examples: my mother regularly picks out weeds from her lawn because chemical spraying has been all-but banned. As a consequence, more and more lawns are looking like well-groomed goat farms. A condo owner doesn't have to worry about it all that much because condos are sequestered from the building's lawn.

The second example, from my neighbourhood: a house on a plush street has been boarded off for at least two years now. There's a sign saying that a tree-preservation by-law forbids the cutting down of any trees there. I don't know how relevant that by-law is to the house's salability - it may not be - but I have seen the two go hand-in-hand on that property. Once again, condo dwellers don't have to worry about that issue.

The condo overbuilding in Toronto is going to end in one of two ways: either the bulge in supply will drive condo prices down, or the market will confound us all by rising. The latter would fuel a bubble in Toronto condos, as a bull market for no rational reason always attracts speculators who don't mind believing in 'magic.' If the latter, then the bubble will end with a huge crash.

In terms of political pressures, though: if there's any kind of real estate that can be fingered as being in long-term decline in Toronto, it would have to be the single-family home. The homeowner seems to be the target of every lefty by-law, and there's little resistance to it as of now. It may seem insane for me to compare Toronto to Detroit, but that city's single-family home stock was gutted in large part because of abusive tax policies and by-laws. I make the comparison to note that it can happen "here" as well as "there."

I seem to have gone farther than you would have. :)    

CoachingByPeter
July 19, 2009 at 11:06 PM

Before purchasing a property, primarily secure that you have enough source of income.  Be certain that you have sufficient funds on a long-term basis to insure that you'll be capable of paying your monthly amortization.

Sivaram
July 20, 2009 at 10:24 AM

hehe LOL I guess asking your opinion on the garbarge strike would be a bit too mcuh huh? ;)

BTW, I live in Toronto but not downtown... My workplace is in downtown...

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