How to Assess Condo Investments Using REAL Data


By Ben Myers

I am often asked what is going to happen with home prices…

Such a loaded question!

I don t have a crystal ball, but there are numbers that I typically focus on to get a sense of where resale prices are trending: resale transactions, resale listings, days on market, sales-to-listings ratio, future supply, changes in new home prices, and a few others. However, I had never actually done any statistical modelling to determine which of these specific measures is better at predicting resale price movements. This is why it is important with any investments or selling of company shares that proper market research is conducted in order to work out things like share of preference using something like a share simulator. This makes sure that investments such as property investments do not go wrong as the current market has been analyzed and checked for any issues in stocks or shares.

To tackle this problem, I took data from top market research firm Urbanation Inc. on the condominium apartment market in the Toronto Census Metropolitan Area (CMA) over the past 20 years. I compared a number of different variables each quarter against the annual movement in the resale index price (year-over-year change in the average price per-square-foot in the CMA during that quarter).

The results were actually quite shocking!

The mainstream media tends to make a really big deal when the level of listings go up in the condominium market, but over the past 20 years in the Toronto CMA, there is almost NO correlation between the number of resale condo listings in a quarter and the movement resale condo prices in that quarter, with an r-value of just 0.06. The best way to explain the r-value is that 1 is perfectly correlated and 0 is no correlation.

To put it in layman s terms, the relationship between hot dog sales and hot dog bun sales would have an r-value of close to 1, because when hot dog sales go up, hot dog bun sales tend to go up. The correlation between gold jewelry and paper plates would likely be close to 0, as neither would likely have any influence on the other.

Something can also be negatively correlated: an example of negative correlation would be average temperatures going down and winter jacket sales going up, or crime in a city going up and tourism in that city going down.

The other shocking result was that the r-value of condo completions to resale price changes was just 0.09. Whenever a positive report on resale condominium prices is released, the pessimists come out in droves and mention the oversupply , or excess of condominiums set to be completed from the near record-high 55,000 units being built in the Toronto CMA.

Earlier this year forecasts appeared calling for up to 35,000 of those units to complete in 2014 alone (causing quite an uproar), however, most of the outlets covering the story failed to mention that fewer units have completed than were forecasted at the beginning of the year for more than a decade. The doomsters like to point to this looming supply as a reason to avoid buying a new condominium, that this blitzkrieg of new condos will increase supply in the resale market and depress resale pricing, ultimately costing you money when you want to sell.

What these people fail to mention is any statistics to back up their statements.

What you need to know

In theory, the assertion that more completed condos will result in lower resale prices is a valid argument based on the tenets of supply and demand (assuming these completed unit are actually listed for sale), but the results here show otherwise. When a greater number of units have completed, it had no effect on resale pricing whatsoever in that quarter!

A few variables had relatively high r-values, including the sales-to-listings ratio (SLR) at 0.59. It is not about the total number of listings or the total number of resale transactions, but the relationship between the two.

The most obvious highly correlated data to the change in resale pricing was Days on Market, which came in at -0.70. It makes sense that the longer it takes to sell a unit on average, the lower the annual price appreciation would be in that quarter. The longer it takes to sell a unit, the higher the likelihood that the seller will reduce their asking price.

Strangely, the highest correlation was with the Quarter s Supply in the new condominium market at 0.70 (0.003 greater than Days on Market). Not total units unsold in the new condominium market, which has been a focus of real estate bears, but the unsold units divided by the average quarterly sales over the past year. A high number of unsold supply is less of an issue, as long as sales are very strong. Quarter s Supply is better at taking into consideration the fundamental shift towards high-rise condominiums taking place in the Toronto CMA, which now allows for a larger number of unsold units in total, because the market is selling more units per year.

In conclusion, be very weary of the conclusions being made in articles that discuss the resale condominium market. A decline in resale activity, or an increase in listings by themselves does not tell us anything, but the relationship between resale activity and listings (the SLR) tells us everything.

Don t be fooled by folks that WARN you of the impending glut of new condominium apartment units coming (less is likely coming than forecast, and not as many of those units are actually going to be listed for sale as some contend), as a higher number of completions has not translated into lower resale condominium prices over the past 20 years!

Ben Myers is the Senior Vice President, Market Research and Analytics at Fortress Real Developments. You can read more from Ben at or follow him on twitter at @BenMyers29

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