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The word "speculation" usually has negative connotations, especially in the world of finance. That's why you'll hear people deride "condo speculators" and talk about things like crypto as being rat poison. Buying something with the sole hope that someone will pay more for it later is viewed as a negative act.
But is this a fair characterization?
Speculation is fundamental to how markets work. It happens when people bet on some unknowable future rather than on present fundamentals. This is an important feature because it's how new technologies and new business models get funded. Without it, we'd only ever fund what is knowable and what already exists.
This doesn't mean that speculation won't lead to failures — by definition it has to. It's uncharted territory. But consider what speculation has advanced along the way: railway networks, utility infrastructure, the internet, crypto, and AI, among many other things. And in the case of condo speculators, the result was that more, rather than less, housing got built.
That's a good thing.
So I think there's an argument to be made that we actually need more speculation in Canada. We need more risk taking and we need people betting on the future, even in the face of uncertainty. Because when you do that, eventually you end up creating it.
Erica Alini of The Globe and Mail just published this article called, "The era of the shoebox condo is over." You should read it, and not just because I'm quoted in it. One thing that I appreciate about the article is that it gets into some of the development economics underlying new projects.
The high-level math provided by Bryn Davidson of Lanefab (Vancouver) once again shows that land is the residual claimant in a pro forma and that the price developers can feasibly pay needs to be greater than the status-quo value. It's exactly what I was getting at in this recent post about the Impossible Toronto publication.
The other thing I'd like to highlight is the following chart showing the share of three-bedroom apartments in newly built condominiums and purpose-built rentals in the city:
Recently, a few people have asked me about whether now is a good time to buy and/or invest in real estate in Toronto. Now obviously this is a general question and a thoughtful answer depends on the asset class, your strategy, and a myriad of other possible factors, but one of the things I've noticed is that many people are trying to be incredibly precise in determining an answer to this question right now.
They'll talk about how much prices have come down, whether the Bank of Canada is going to lower interest rates again this fall (which seems probable), and then question whether it may be more optimal to buy in, say, 4-6 months versus now. It is, of course, always beneficial to be analytical, precise, and thoughtful about risk when evaluating major financial decisions, but I find it interesting just how perfect people are trying to be about timing.
It's interesting because when things were exuberant, the amount of worry over optimal conditions was clearly less. More people just believed in the market, believed in Toronto, and believed that immigrants would continue to move here at a high rate. It felt right. Greed ruled over fear. But as these market cycles go, the opposite is true today. Fear is the more dominant emotion. Many people are scared about making a bad decision, which is expected, but arguably ironic at the same time.
It's expected because it is harder to make what feels like a high-conviction bet when the market is moving in the opposite direction, things are uncertain, and there are few people to follow. But it's ironic in that it's significantly easier to find value today than 3-4 years ago. The best opportunities exist where other capital is not flowing, and a lot less capital is flowing into Toronto real estate these days.
The one caution — and as a reminder, nothing in this post should be viewed as any sort of investment advice — is that just because an asset is cheaper than it was before, it doesn't mean you've found great value. Many assets are cheap because they deserve to be cheap. Be mindful of this risk. The trick is finding high-quality undervalued assets that the market may one day recognize at their true value.
In my view, it's an unnecessary distraction to worry about whether market conditions might become incrementally more ideal in the future. One, because it's pretty much impossible to time a market. And two, because down markets are a much more productive time to feel FOMO. So what might it mean in practice to not be a timer of markets?
I like how Howard Marks once put it (though keep in mind he is not a real estate guy). He described it in the following way. On the upside, it means he doesn't sell in expectation of a market decline. He might sell an asset because he thinks the investment case has deteriorated or because he's found something better, but he doesn't sell just because he thinks a crash is coming. He continues to play the long game.
He also argues that selling at the bottom is easily worse than buying at the top of a market. The reason being that the former locks in your losses and takes you out of the game, whereas in the latter case, you can just wait until the market rebounds. The next top is usually higher than the last. (The lesson for highly-levered assets like real estate is to be careful with leverage.)
On the downside, it means he doesn't say, "it's cheap today, but it'll be cheaper in six months, so we'll wait." If it's cheap, he buys. And if it gets cheaper, he buys more (assuming his thesis holds). That's not possible if you're just looking for a single home and aren't able to dollar-cost-average across multiple assets, but it doesn't change the fact that timing a market is essentially impossible and that a fearful market should be viewed as a feature, not as a bug that paralyzes decision making.
As Marks has written, "in extreme times, the secret to making money lies in contrarianism, not conformity."
What's interesting about this six-year period of completions is that there isn't a meaningful difference between condominiums and rentals. Average unit sizes as a whole tend to be slightly larger in rental projects, but in terms of the share of three-bedroom suites and the average size of those three-bedrooms, the differences aren't meaningful.
This suggests that it's less about investors "distorting" the market (see pundits talking about the condo market), and more about the fact that the demand isn't there. And the reason the demand isn't there is because these types of homes are expensive. If you can afford $5,000 per month in rent, you generally have some options.
Table from the Globe and Mail; cover photo by Lotus Design N Print on Unsplash
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