By Susan Pigg | Mon Oct 03 2011

http://www.moneyville.ca/article/1064037–bidding-wars-erupt-for-prime-rental-condos?bn=1

The market for rental condos is becoming almost as hot as Toronto’s resale housing market with bidding wars breaking out among tenants trying to snag prime units.

While some 21,000 units are now under construction in Toronto — 5,707 of them in the downtown core — demand for rental condominiums continues to far outstrip supply, housing experts say.

That’s driving some tenants to offer up to six months’ rent in advance, or more rent than condo-owners are asking, especially for increasingly rare two-bedroom units.

In fact, the condo rental market has become so fiercely competitive the last year in particular that would-tenants are being urged to not even look at prime downtown units without bringing along a printout of their credit rating, proof of their annual salary and a willingness to pay more rent if need be.

“It’s a form of key money,” acknowledges realtor Brad Lamb who put a new, 480 square foot studio up for rent last week and had three takers within three hours.

One 26-year-old man offered $1425 a month — $30 more than Lamb was asking — and agreed to have his Mom co-sign the lease as security.

Lamb expects to see similar offers on 12 other studio units he plans to rent out soon, all of them in the King St. W. and Stafford St. Parc Lofts and Condos building his company, Lamb Development Corp., has just built.

“It’s not just bidding for price, this means that as landlords we’re able to pick excellent quality tenants from a credit standpoint as well,” says Lamb.

The increasing competition for rental condos — especially in hip new hardwood- and granite-clad units just blocks from the downtown core — doesn’t come as any surprise to Lamb.

He’s been tracking Toronto’s rental market monthly and says two years ago there were an average of 1,300 condos for rent on MLS, the listing system preferred by many investors who don’t want the hassles of renting units themselves via Craigslist or Kijiji.

That’s now slipped to less than 500 for rent.

Bidding wars have become most common in the two-bedroom rental market which is being all but abandoned by developers in favour of one-bedroom and studios which are cheaper and easier to rent, according to market research firm Urbanation.

Real estate agent Mark Savel was involved in four condo rentals last month and three resulted in bidding wars. One couple ended up paying $2,000 for a furnished one-bedroom plus den in Liberty Village that had been listed for $1,900.

In another case, a woman offered a $25 per month premium on a one-bedroom plus den listed for $1900. But her biggest advantage was that she came to the viewing with all the right paperwork, including a list of personal references, said Savel.

Realtor Dominic Calla warns renters the competition for good condos can be just as intense as for a good house, and he knows agents who’ve backed out of the rental market altogether.

“We’re pretty used to getting into multiple offers on houses, but for a lot of us this is becoming the exact same amount of work as a sale. Having to take tenants out again to look at properties and draft all the paperwork can be extremely frustrating.”

Note: to see  the video and article click here.

Toronto Councillor Adam Vaughan can tell the minute he looks at a condo building in his downtown ward if it’s full of renters or home to owners.

“The bigger the building, the higher the rate of renters,” says Vaughan.

The optics can be even more obvious when he steps inside. Even newer buildings can have the feel of university dormitories with shabby lobbies and cheap carpeting meant to keep down maintenance costs for investors who own a unit or two but may live half a world away.

With Toronto’s condo market among the hottest in the world right now — almost 68,000 new units are now in the planning stages or under construction across the GTA — investors are cashing in big time on what looks like a sure bet compared to battered stock markets.

Some 45 to 60 per cent of all new condos planned for the GTA are being snapped up by investors, says market research group Urbanation. That number is believed to be closer to 80 per cent in the downtown core where 12 new highrises, with 5,707 new units, are creeping floor by floor into the Toronto skyline right now.

That frenzy of investor activity is now being seen — and felt — as developers try to keep condo prices down by building more, and smaller, units meant to maximize investments for people who will never have to live in studios smaller than hotel rooms.

The surge of investors is part of the reason new downtown units are now averaging just 749 square feet — about half the 1,440 square feet average being built in crowded Manhattan.

While there are growing concerns about where Toronto’s condo market is heading, the activity here comes as a shock to Jonathan Miller who monitors the U.S. as president and CEO of Manhattan-based Miller Samuel Real Estate Appraisers & Consultants.

“If this isn’t a bubble, I don’t know what is,” says Miller. “This is going to end badly.

“You can’t have such a rapid influx of supply without this going too far. One thing I’ve learned is that builders will build until they can’t build anymore.”

Ben Myers disagrees. The editor and executive vice president of Urbanation has recently started tracking rental demand for those condos.

“This (condo building spree) is providing the city’s rental stock,” he says, adding that some 100,000 new people are flocking to the GTA each year.

“We are one of the only markets in the world that is catering to renters and first-time buyers by creating these smaller suites. In my view, this is absolutely the best approach. Great cities grow and expand, they have people walking around and you can only do that if you have a lot of people living downtown.”

While Vaughan has fought hard to see continued construction of larger and three-bedroom units that provide a better mix of residents, he finds older condo dwellers are gravitating to smaller buildings where the number of owner-occupants tends to be higher.

Developer Peter Cortellucci has seen what’s happening downtown and his Cortel Group made a conscious decision to head the other direction. Its five new condo towers planned for the Vaughan Metropolitan Centre at Highway 7 and Jane St. will feature bigger units and sales contracts discourage buyers just looking for units to rent out.

“We’re trying to create a sense of community and a neighbourhood where people actually live,” says Cortellucci, vice president of Cortel.

“We took a bit of a risk with large units and we’ve been quite successful so far. We wanted people to come in and say, ‘I could really live here.’ We didn’t want it to be too far a stretch from their homes.”

When you describe this requirement to a prospective tenant it is essential that you describe it as being for their benefit. See the following article from the Toronto Star:

Do renters need insurance?

Contents insurance is something most renters don’t put too high on their list of priorities.

In the grand scheme of expenses, many feel it’s a cost they can do without, believing the likelihood something bad will happen is slim.

According to the Insurance Bureau of Canada, about half of all renters don’t have insurance, especially young people. They also fail to appreciate the full value of their clothing and personal belongings.

But there are other factors to consider, such as a tenant’s legal liability.

For example, you could be liable if your toaster oven causes a fire and it affects other units, or if you accidentally leave a tap on in the bathroom and the water causes damage.

The building owner could charge you for the cost of the damages, but they would be covered under your contents insurance policy. Without insurance, it would come out of your pocket.

But can a landlord make renting a unit conditional on having contents insurance?

Francis is a Toronto tenant who was looking to sublet her apartment. Her landlord met with the people interested in subletting and insisted they would be required to have contents insurance.

Francis and her roommate were never asked about contents insurance and she has never owned any in the 10 years she’s been renting. Although she understands she won’t be covered in the event of a fire or theft, she doesn’t think her furniture and possessions are worth the expense of insuring — especially since the odds of anything happening seem quite low.

Barrie-based paralegal April Stewart says contents insurance isn’t required under Ontario’s Residential Tenancies Act. However, landlords do have the right to insist on seeing proof of insurance prior to accepting a tenant or a sublet.

“Landlords who wait until after giving possession can try to evict based on no insurance, however there are inconsistent decisions on the matter,” says Stewart.

In the 2005 case of Stanbar v. Joseph Rooke, the Ontario Superior Court of Justice upheld that tenant insurance coverage, if required in the lease, is enforceable and can be grounds for eviction.

The decision states, “The Act is silent about whether or not a landlord has the right to demand that tenants maintain insurance, or that they provide proof of coverage to their landlords. However, if the parties agree to it, it, too, becomes a contractual issue….”

Based on her own experiences, Stewart says tenants can be evicted, depending on who the adjudicator is, as there is little consistency in decisions.

Stuart Henderson of the Ontario Landlord Association says landlords try to educate tenants about the benefits of contents insurance.

He insists it’s a good investment at a low cost. Premiums are typically based on the value of the contents, and can range from $100 to $500 per year. Luxury items like jewellery can cost more to insure.

Stewart knows the value of having contents insurance. She recently experienced a break-in at her own rented Barrie home and lost $10,000 worth of possessions.

“They didn’t damage anything and, in that regard, we were relieved. My daughter lost all of her jewellery though — not overly expensive, but sentimental value, which upset her a lot.”

The single mom adds her daughters still feel quite vulnerable. “I’m not comfortable leaving them home alone now, even though they are old enough. Clearly, someone snoops around and I don’t want anything else to happen.”

“Tenants may wish to look at it another way: insurance is a small investment that provides real protection. I can attest to that. I’m a tenant, I have insurance, and was very happy about that several weeks ago when I came home to find my home burglarized,” says Stewart.

Contents insurance also provides for additional living expenses – up to 20 per cent of their contents amount if there was a fire and they had to leave the building.

Renters should also consider estimating replacement value of goods, especially furniture and electronics, not what they think is the value of their aging recliner and sofa.

To determine the value of contents, the Insurance Bureau of Canada suggests making a list which can include writing everything down, but faster ways include using a camera or video recorder, or using a digital or tape recorder. It’s also a good idea to keep receipts, warranties and instruction manuals for things like televisions and computers in case you need to make a claim down the road — they serve as proof of ownership and value. Store these items in a safe deposit at a bank, at another location or in fireproof box.

For more information:

http://www.ibc.ca/en/Home_Insurance/Tenant_Insurance/_

http://www.theglobeandmail.com/globe-investor/personal-finance/home-cents/seven-tips-for-renters/article2081904/

My husband and I were fortunate enough to buy our downtown Toronto home before prices shot through the roof.

That doesn’t mean we don’t struggle to balance mortgage payments with the many other costs facing a young urban family, but it does mean that we don’t need to go through the hassle of upgrading to a larger house. We love our neighbourhood and thankfully, we have enough room here to accommodate our growing toddlers.

More related to this story

• Why renting can be the right choice for aging boomers
• Six signs it’s time to buy a house
• Renting v. buying your home: an affordability check

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The housing affordability problem

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Home economics for homebuyers

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Can you afford to buy a home?

Plenty of our friends, however, are in a different situation. With new children here or en route, many are looking to sell their starter homes and buy something a little bigger, or just plain different, from what they have now.

Some of them have decided to take advantage of the massive jump in housing prices by selling now and renting while they look for their dream home. There are of course plenty of other groups who are currently renting – among them those still trying to get their foot in the housing market and aging Canadians who are looking to benefit from the massive appreciation of their family home.

With the cost of owning a home not only exceeding the cost of renting but nearing all-time highs, renting a home makes more sense than ever.

Tax and financial planning expert Tannis Dawson, who works for Investors Group in Winnipeg, has these tips for renters looking to maximize their housing situation:

1.) Be a legal beagle
Renting may not be as complicated as owning a home, but there are legal issues to consider. It’s important to know your responsibilities as the renter, the landlord’s responsibilities and how to move on when you are ready to rent somewhere else or buy a home.

2.) Sign a lease
A lease, or rental agreement, is a written contract that lists the rights and duties of both landlord and tenant. Make sure you have one. Because it is a legal document, it can be enforced by a court. Verbal agreements or assurances are hard to prove and not easily enforceable.

3.) Before you sign on the dotted line…
While you won’t be exposed to interest rate hikes, your rent may rise periodically as a result of rent reviews. Always check to see how rent is reviewed before you sign.

4.) Fly the coop but keep the nest egg
One option for homeowners, especially aging boomers, is to sell the family home and use the proceeds of the sale to invest. If done wisely, you can generate income without touching the principal.

5.) Take a practice run
The cost of owning a home is, on average, between 10 and 20 per cent more than renting. For renters who are saving towards the purchase of their first family home, develop an enforced savings plan to help you achieve your goals. Calculate the cost of buying and maintaining a home within your means, and deposit the monthly difference between rent and home-buying costs.

6.) Do the math before making a move
If a potential homebuyer has $85,000 saved up for a down payment and deposits that, along with just half of the monthly savings over buying ($578 per month), into an account at 8 per cent deferred growth, the balance in just ten year will hit nearly $300,000 (before taxes). That’s a liquid investment that can be used for whatever you want, no relocation required.

7.) The gift of flexibility
There’s no need to rush into any decision. Whether you are deciding to buy, thinking about selling and deciding what to do with the proceeds of a pending sale, renting buys you time and flexibility. It’s easy to move and simple to relocate when you don’t own a property. Before making any move, talk with a financial expert and get as many suggestions as possible. Your decision will affect you for the rest of your life.

Roma Luciw is the web editor of the Globe Investor personal finance site and writes for the Home Cents blog.

Canada’s housing market is in a bubble that’s set to burst and prices could plunge by as much as 25 per cent, a major independent research firm warns.

“Housing valuations have lost all touch with fundamentals and household debt is at a record high,” economists at the research consultancy Capital Economics say in their most recent Canada Economic Outlook, issued Wednesday.

“Our fear is that, with the housing bubble now close to bursting and commodity prices retreating, Canada will go from leader to laggard.”

The report predicts a fall in house prices by as much as 25 per cent over the next three years.

A domestic housing boom coupled with high commodity prices worldwide have spared the economy the severe recession felt by other developed countries.

Canada’s economic success could become the thorn in its side as the threat of a downturn in the housing sector looms, the report says.

The firm says a burst housing bubble would shrink real estate investment and hurt consumption — two things that would considerably slow economic growth.

This decline in consumption would mean a slowly rising unemployment rate as well, according to Capital.

The company says Canadian house prices are overvalued by approximately 25 per cent, close to excessive levels seen in the frothy U.S. market at its 2006 peak.

Over-building is already visible; the number of unoccupied houses and condos is at a record high. It closely resembles the 1994-95 housing slump, when the construction industry experienced a severe downturn.

The report forecasts falling house prices and smaller residential investment. Real estate currently makes up 6.8 per cent of Canada’s GDP. Lower prices would mean a hit to household net worth as property now accounts for one-third of a family’s total assets, the report found.

The firm expects the Bank of Canada to stay the course in the near term, as financial worries at home and abroad will keep interest rates at their current level for a while.

Sell your house and rent: If you’re a baby boomer entering retirement, that could be the financial move of a lifetime.

The case for selling the family home starts with the fact that years of strong price increases have hugely increased the value of homes across the country over the amount paid for them. What to do with the proceeds after you sell? Invest them conservatively and rent your next home.

More related to this story

• Six signs it’s time to buy a house
• Monthly home ownership costs higher than renting
• The pitfalls of buying a foreclosure house

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The optimist’s view on housing

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Where to buy U.S. real estate

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Preparing for bigger mortgage payments

Rushing into the market today only makes sense if you’re willing to buck convention and rent. If you buy again, you could reap big profits from your current home and overpay for your next.

Understand, this is not a doomsday call on the Canadian housing market. It’s just an argument that we’ve seen a ton of upside in house prices and that the next few years may bring incremental further gains or some downside.

Selling now can be a way of removing risk from your financial future, says Ted Rechtshaffen, president of the financial advice firm TriDelta Financial. If you own a house, a big piece of your personal wealth is tied up in one sector and in one region.

“The only way to capitalize on what your house is worth today is by selling today,” Mr. Rechtshaffen said.

There are definitely benefits to downsizing and buying a smaller home or condo rather than renting. There’s a far better selection of condos and houses for sale than for rent. Psychologically speaking, many people have a bias against renting because it’s seen as giving up control and living without roots.

There’s also the argument that renting isn’t financially smart, but it doesn’t hold up well for aging baby boomers.

Mr. Rechtshaffen says his firm’s long-term financial planning models use a 4-per-cent average annual gain for house prices and a 6.5-per-cent average annual gain for a diversified non-registered investment portfolio. Those are pretax numbers, of course. Sell a principal residence and you pay no taxes on your profit.

You can rig an investment portfolio to be fairly tax-efficient by focusing on dividends and capital gains, but you’ll still get dinged to some extent by taxes. So estimate a 5-per-cent after-tax return from investments, Mr. Rechtshaffen suggests.

Now for living costs. You’ll have no mortgage payments if you buy, but you’ll pay property taxes and face upkeep costs that can be steep if you have an older home. Renters pay rent and the same utilities as owners. How does it net out? Mr. Rechtshaffen estimates renters paying $1,500 a month may find they’re spending only $700 or so more than owners on a net basis.

Financial planner Rona Birenbaum said she’s talked to clients about selling a house and renting, but mostly in situations where money is being spent faster than anticipated and there’s a need to unlock equity in the home.

Selling a house for many hundreds of thousands of dollars and then investing that money safely can make you feel financially secure, Ms. Birenbaum said.

“That’s the plus side of doing this,” she added. “The minus is there’s a great temptation to encroach on that capital. It requires a fair amount of discipline in how you manage your cash flow.”

Still stuck on downsizing into a smaller home or condo? So are a lot of your peers, which is why downtown condos are no bargain. The average price for a resale condo in Toronto was $326,750 in the first two weeks of this month, according to the Toronto Real Estate Board. Laurin Jeffrey, a Toronto agent, said $600,000 is a good ballpark amount for a nicely situated downtown condo.

If you buy a condominium, prepare yourself for stiff condo fees (include day-to-day maintenance, property management fees, amenities such as a swimming pool and workout room, cable TV and contributions toward a reserve fund to be used for major repairs). I’ve heard two stories in the past couple of weeks about people planning to move out of condos as a result of fee increases or special levies for maintenance. “There’s no rent control on maintenance fees,” Ms. Birenbaum said.

Your age may also play a role in determining whether it’s better to buy or rent after selling the family home. Mr. Rechtshaffen estimates you’d need to be in a home seven or eight years to offset the costs of moving in and then moving out again later on. Of course, this assumes your house is appreciating while you live there.

Renting is not on for most people, but it’s worth a thought if you’re a baby boomer with a house you’ve been thinking of selling. The peace of mind you get from locking in a good price could make it the financial move of a lifetime.

Boomernomics: Whether to buy or rent after you sell the family home

The Buy Side

Beware the distortions of too-low interest rates

We’ve had low interest rates for years, and really low rates for almost three. We’re used to them, and may even be getting complacent. I had more questions and concerns from clients about rising interest rates a year or two ago than I do now.

Well, I’m here to tell you that it’s not a time to be complacent. Quite the opposite. Low rates are causing enormous distortions in the economy and financial markets, and it’s important to understand them, and try to be on the right side of the divide.

Before explaining, I want to be clear that I’m not calling for interest rates to rise next week. I have no idea where they’re going short term, nor is our bond manager calling for a big change.

But taking a slightly longer view, investors and borrowers need to recognize that interest rates are artificially low. By that I mean, the normal mechanism for setting prices has been tampered with.

The U.S. Federal Reserve is holding short-term rates near zero in hopes of stimulating the economy. As a result, the U.S. government, and other more creditworthy institutions, are able to issue bonds at rates that don’t even offset expected inflation (i.e. the real or after-inflation yield is negative). A five-year U.S. Treasury bond is yielding 1.5 per cent.

This Fed subsidy serves to transfer wealth from the lender to the borrower.

Bill Gross of Pimco describes it well. “The artificial yields, in effect, act as a tax on savings, undercompensating asset holders and transferring the haircut benefits to the debtor nation.”

Who Benefits

Unfortunately, Fed chairman Ben Bernanke can’t control who he subsidizes. So while helping out indebted home owners and the government, he’s also giving a boost to borrowers who don’t need any assistance, including profitable corporations, hedge fund managers and Canadian home buyers. Here come the distortions.

For starters, people saving for retirement, or already living off their investments, are being stolen from. Returns from their bond portfolios won’t be adequate to live off of going forward, let alone keep up with inflation. To attain a reasonable amount of income, they’re forced to take more risk.

By encouraging more risk-taking across a broad range of assets, too-low interest rates push prices up. Corporate bonds are the most visible example, but stocks, real estate and other long-term assets are also affected.

Real estate is a great example. Prices are driven by a number of factors (the economy, jobs, location and, in the current context, Chinese buyers), but they’re always linked tightly to interest rates. With rates where they are, prices on both commercial and residential properties have risen steadily in Canada, with some income properties now being transacted at “cap rates,” or yields, under 4 per cent. A property manager I know describes the availability of cheap credit as “rocket fuel.” Real estate is all about location, location, location, but these days rates, rates, rates aren’t far behind.

Neither a Borrower Nor a Lender Be

So it’s not a great time to be a lender. Yields are low and the assets being financed may be on the pricey side.

Is it a good time to be borrower? Certainly, if you’re refinancing existing obligations, it’s the best. Your cost of borrowing goes down while the value of your asset is going up.

But what about borrowing to buy an asset? Would you rather buy an expensive house with a cheap mortgage, or buy a cheap house with an expensive mortgage?

Of course, there’s only one answer to that question. As an owner, you live with the price forever. Buying low always make the economics work better. Favourable financing terms, on the other hand, are transient. There is a risk that the mortgage has to be renewed at a much higher rate. Unless you’re a government or corporation that can raise 25-year money, you can’t match your liability – your mortgage, in the case of home buyers – to the life of the asset.

Low-cost financing is intoxicating, and it’s nice to be subsidized, but we need to keep our intake in check. And we need to make sure that the valuations on our assets make sense, not just today, but in non-artificial times as well. It’s not a time to be complacent about too-low interest rates and the impact they’re having on the economy and our investment portfolios.