Historical article note: This article was originally published on 2019-07-18. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Recently, I attended the sales launch event for the largest developer's new condo in Toronto, and the numbers on the price list surprised me. Roughly calculating, if I sold my suburban detached house, I could just afford a three-bedroom unit in this development, but the living space would shrink by half. Currently, the price per square foot of high-rise buildings in the city has already exceeded the per-square-foot price of suburban detached houses by more than twice. No wonder many friends ask whether condos in Toronto still have investment value.
Investment is about using the difference between monetary income and monetary expenditure to purchase assets that generate passive income, balancing the flow of income over a lifetime. Whether real estate is worth investing in depends on three factors: interest rates, city, and rent. In a low-interest-rate era, you cannot invest in debt-type assets, only in ownership-type assets, such as stocks and real estate. Choosing the right city is the most important aspect of real estate investment; a city worth investing in must have continuous population inflow and limited land supply flexibility. Rent is the source of strength for long-term leverage for real estate investors. Currently, Toronto condos meet these three conditions: low interest rates, continuous population inflow, stable rent growth, and low vacancy rates. Condo prices have been catching up since the end of 2016, and they have now made up for the previous years' price increases that lagged behind detached houses.
In the early stages of urbanization, rural areas didn’t have flush toilets, so moving to high-rise buildings in the city was a form of honor. After cars became common, cities became flatter again, and large suburban houses with private yards became highly desirable. The model of high-rise city buildings with subways and elevators did not compete with the extravagant North American pattern of living in large suburban houses and commuting by car for the past few decades. Today, suburban residents, looking back, find city high-rise prices have surged far ahead; if they want to move back to the city, they can only reluctantly reduce their living space by half. Isn't it said that the Internet has changed the way information is communicated, and the world has become a global village? Hasn't the advantage of cities disappeared? Why do high-rises in the city still proudly maintain high prices, and even increasingly higher ones?
01 Information connectivity cannot replace spatial connectivity
In his early years, when Cao Dewang worked as a purchaser at the village glass factory, the main challenge was obtaining glass quotas from within the system to meet the production needs of his township factory. The monopoly and exclusive control of production materials have existed in China since ancient times, from Guan Zhong's salt and iron monopoly to Sang Hongyang's Treatise on Salt and Iron. The phenomenon of scarce resources being monopolized still exists today. Production materials are not available on the market and can only be obtained by "asking someone." In Cao Dewang's time, the place to get glass quotas was the baths in Fuzhou; they were acquired by soaking together with purchasers from large factories. Cities, and the bathhouses within them, served an irreplaceable function as information hubs in that era. If you didn’t go to the city baths, you couldn’t get glass quotas. In a time without the internet or mobile phones, close-range, high-density interpersonal interaction spaces were the nodes of social networking. Today, this information-hub function of cities and city baths has been completely replaced by the internet, mobile internet, and even the future 5G Internet of Things. The days of scrubbing each other in bathhouses to get quotas are GONE. Cities still retain the functions of resource space and physical space. The value of this resource and physical space is also the value of the share of urban space we purchase. Without living in the city, it would even be difficult to work as a food delivery rider. If you sign a life insurance contract worth one million, would you do it online? You would at least meet in an official place several times, right? During his lifetime, Steve Jobs personally drew the design for the Apple industrial park, a closed circular loop, aiming to let bright innovators encounter other elites within the company, thereby realizing ideas and maintaining authority without leakage. How much of our current state and abilities did we learn in school? Most of it was learned through work and social interactions. Living in the fields of hope, you won’t meet so many people. The information-gathering function of cities has been replaced by technological progress, but technology cannot replace the value of a city's resource and physical space, because humans are social animals who need to communicate and learn together to advance collectively.
02 The Flat World, Towering Cities
Taiwan entered the world of concrete and steel jungles earlier than the mainland. When mainland people were celebrating that they could finally move into apartment buildings and use flush toilets, Taiwanese singers were already singing, 'Dense high-rise buildings everywhere, I can't find my home. On the crowded streets with people coming and going, wandering the world, I carry a heavy shell on my back, trying hard to climb up, yet I can never keep up with the skyrocketing housing prices.' This 1992 Taiwanese folk song, 'The Home of the Snail,' wasn't adapted into a mainland TV series, 'Dwelling Narrowness,' until 17 years later. Early or late, we all experience the happiness and pain of urbanization.
"A city is a place where millions of people live in solitude together." This sentence is quite poetic, right? Sounds familiar? Yes, it's a line from *Walden*. I was quite surprised to see Thoreau's work appearing on the bestseller shelves at Beijing Capital Airport. Are the Chinese also starting to resent city life and feeling a desire to return to nature? Many people have just left the wheat fields, yet some are already considering going back to nature. Why are there such big differences between people? It's the same all over the world. When people rush into cities at high speed, they find it too crowded and want to get out. Moving to the city is for safe drinking water, better education, and more job opportunities. For people from rural and impoverished areas, the city holds something they crave that their native environment doesn’t have—hope. Among the population currently living in the lower layers of the Earth's surface, at least half are not forced into basements by city development, but because their original living conditions are worse than the basements in the city. Cities have historically attracted poor populations; it is not the city that causes poverty. If the number of people flocking to cities exceeds the number of people who have achieved a certain status and then pursue luxurious suburban life in North America, then the density and housing prices in cities will continue to rise. When the urbanization rate exceeds 70%, it enters the post-urbanization stage, that is, the large city cluster stage, where the population concentrates in the largest cities, and other small- and medium-sized cities become hollowed out. With an urbanization rate of 81.3%, Canada has long entered the post-urbanization stage, while China, with an urbanization rate of only 58.9%, has not yet reached it. The characteristics of post-urbanization are evident in Canada, with population concentrating in Toronto, Vancouver, and Montreal, while the population of other cities has barely grown. The skylines of these three cities will grow taller, with Toronto’s population increasing by 5.6% annually, far ahead of other cities. In the future, we will see a towering Toronto and a flat Canada."
03 Which has more investment value in Toronto: high-rise buildings in the city or detached houses in the suburbs?
The unit price of high-rise buildings in the city is higher than that of suburban detached houses, but suburban detached houses are larger in size. Buying a detached house still requires greater affordability. In recent years, suburban detached houses in Toronto have been popular among new immigrants, with price increases far exceeding those of city high-rises. However, since 2017, apartment prices have seen significant catch-up growth. Which type of property, suburban detached houses or city apartments, has greater potential for appreciation in the future? My personal view is that city apartments have greater potential for future appreciation. CMHC recently released a report titled 'GTA Location and Commuting Choices: The Effect of Commutes on Lower Priced Suburban Housing,' which calculated and compared the total housing and commuting costs for people living in suburban low-priced homes but working in the city of Toronto. The main conclusion is: many Greater Toronto Area residents are moving to surrounding low-priced housing areas, but commuting costs are higher; the increase in commuting costs can usually be offset by lower housing costs; using public transportation can reduce total living costs. According to the statistics in this report, residents living in the Greater Toronto satellite cities around Toronto who work in Toronto have total spending on housing and commuting that, in six cities or towns, exceeds that of residents living in Toronto and using public transportation: Stouffville, Aurora, Oakville, Vaughan, Markham, and Richmond Hill. From a purely financial expenditure perspective, the living situation of these residents is 'too extravagant,' creating pressure or motivation for moving back to live and work in Toronto. The report further analyzes the potential financial losses caused by wasted commuting time, i.e., commuting time multiplied by the hourly value of time.
From the cold, hard numbers, in most regions, living in a satellite city is a reasonable choice for residents who have a long commute but cheaper housing, except for the six aforementioned "luxury" cities/towns. The residents of these six "luxury" towns can be said to be the financially strongest residents. Whether they would move back to live in Toronto city purely for financial reasons is uncertain. The public elementary school population in the city is diverse; one needs to use public transportation in the city; suburban properties offer larger living areas, and other factors will directly influence families who have already chosen luxury living conditions in their decision to move back into the city. If the children are already grown and there is no need to consider school districts or living space, moving back to the city can still be considered as a life option. These individual intentions and choices are hard to predict and measure, and the city's dynamic balance is constantly changing based on the choices of "coming in" or "going out." Overall, living in the city and using public transportation is still the best choice for financially limited families with few options. Therefore, my personal view is: living in Toronto is a suitable choice for first-time homebuyers and for families whose careers are still climbing; families choosing "luxury" living conditions are a minority. Thus, properties within affordable ranges in Toronto, especially high-rise apartments, will continue to sell well, and their prices will gradually be pushed higher.
04 Should I buy a second-hand house or a pre-construction property?
When choosing to buy a CONDO, some people say to buy pre-construction units because the price increases quickly and you can live in a brand-new home. In fact, in terms of price growth, pre-construction units and second-hand homes should be the same. For example, in 2014, someone bought a pre-construction unit in Y Condo, which has not yet been handed over. The purchase price at the time was 730 per square foot, and the current market evaluation is 1068 per square foot. According to the bank's evaluation report, the bank bases its assessment on the market prices of surrounding buildings. I checked, and the market price of this CONDO refers to the market prices of three surrounding properties, one of which had a market price of 722 per square foot in 2014, and its current market price is 1066 per square foot. Since the market evaluation price at the time of the new condo handover completely depends on the market prices of similar surrounding properties, saying that pre-construction unit prices increase more than second-hand home prices has no basis. Compared to buying a pre-construction unit, if one had bought a second-hand home in 2014, five years later, one could already take out a mortgage and extract home equity to buy another investment property. In terms of capital use and turnover efficiency, buying a second-hand home is twice as efficient as buying a pre-construction unit. If you don’t care about capital efficiency and mainly care about living in a new home, you can buy a pre-construction unit.
In December 2018, the average price of a resale condo in Toronto was $560,000, while the average pre-construction condo sold for $790,000. The prices of new condos have already far surpassed those of resale units. These pre-construction condos will be delivered in four years and will then become resale properties. The price in the futures market serves as a guide for the spot market. If you think current resale prices are too high, what will the market prices look like four years from now? The pre-construction condo price is the developer's asking price, and developers set prices based on costs and the supply-demand relationship. Pre-construction condos, as a type of futures, must be delivered unless the developer breaches the contract. The market price of condos in Toronto four years from now can be referenced by the current pre-construction condo prices. Do you still think that the current prices of condo apartments are too high?
Conclusion: Housing prices reflect the supply and demand relationship, as well as psychological expectations and people's confidence in a city's development. Whether high-rise buildings in a city are worth investing in depends on which city it is, as well as the purchasing power of its residents and their confidence. The appeal of city life is reflected not only in the diversity and convenience of life but more importantly in the balance future residents draw between the cost of living and the opportunities for self-realization. Although each family's conclusion may differ, the historical process of metropolitanization in large cities is unstoppable. Nothing can prevent new settlers from believing that, although housing prices are high, they still need to go to big cities to realize their own value. This is the charm of the city, the triumph of the city. High-rise buildings in cities still hold investment value.