Who are micro-condos really for? Because they are not first time buyers
Whether out of necessity to create more housing or the desire of for-profit developers to install as many units as possible, Toronto has slowly but surely become home to a multitude of micro-condos: apartments the size of a shoebox not exceeding 400 square feet.
These units are plentiful and usually have copy-and-paste similarity, even between buildings. There’s often a “kitchen” flat against one of the walls – some so small they only have a two-burner cooktop – a bathroom just big enough to turn around in and, if you lucky you, a very narrow, but separate, bedroom with sliding glass doors. Other layouts opt for a rectangular studio, giving “open concept” a whole new meaning. It’s not much, but thousands of GTA residents have learned how to make it work.
The sobering reality is that these units, often priced around the $500,000 mark, are often the closest in reach to new owners, and young owners in particular. But they are not necessarily the ones who can buy them.
“The majority of these types of units tend to be bought by investors,” said Layers Constable Nathaniel Hartree-Hallifax. “What percentage of that, I can’t really say.”
One — but not the only — reason for investor interest in these units is that their smaller size tends to work better for people looking for short-term housing, says Hartree-Hallifax, which which makes them attractive rental properties.
“When you’re talking about the bigger mics that are 400 square feet or less, the people who usually want that are those looking to use it like Airbnb, or a student rental, or someone who’s not going to be there for a very long time,” he said.
The mortgage problem
The other reason, as is often the case in Toronto, is that there is a financial barrier. Many mortgage lenders have always been hesitant — and some still are hesitant — to grant mortgages for units below a certain square footage. Depending on the financial institution, the threshold can vary from 600 to 400 square feet.
Without a readily available mortgage option, many of these units are purchased outright by those with enough cash to do so.
“These micro condos that seem to be targeting first time buyers who maybe don’t have the budget for a plus-den or a bigger unit, those people can’t buy these condos because they have to buy them all in cash or get a private loan and pay an insane interest rate,” the agent said. Anya Ettinger of Bosley Real Estate.
Although micro units represent only a small fraction of the GTA condo market, sales of condominium units under 400 square feet have slowly increased over the past 10 years, from just under from 0.6% of all GTA condo sales in 2011 to 1.6% of sales in 2021.
Toronto based mortgage broker Paul Meredith says that this growing popularity, combined with the current hot market, is causing some lenders to relax their regulations, especially for sales in downtown Toronto.
“Because the market is so hot, and especially the condo market is so hot, they’re getting a little more relaxed with these policies,” Meredith said. “The initial issue with the size was that lenders were concerned about the saleability of this property. So, in the event that the borrower were to default, how easily would he be able to unload this property? The reason lenders are becoming more and more relaxed is that small units are becoming more common.
But that doesn’t mean it’s gotten easier to get a mortgage for a micro-condo. In fact, some lenders won’t mortgage studio apartments altogether, Meredith says. However, mortgage applicants can always ask for exceptions to a bank’s regulations, square footage being one of them, but the location of the condo plays a big role in determining success.
“When you have micro-condos, it’s more on a case-by-case basis,” Meredith said. “A lender will look at the area and if that type of condo is common for that type of area. So if they’re buying in the middle of downtown Toronto, obviously micro condos are becoming more common. .. Now, if they were buying, say, a micro condo in Brampton or Hamilton or Niagara Falls, that’s not typical for that area, so it would make it much more difficult to get the necessary financing.
With the rising market already pushing property after property further out of the reach of aspiring buyers, Ettinger says it’s time for lenders to change their approach to financing these units.
“They have to adjust it, otherwise who can buy anything but investors?” she says.
Hartree-Hallifax underscored this, noting that in today’s market, the salability of micro-condos isn’t far behind other types of units.
“The reason is, in general, [lenders] think they are harder to sell and also the most subject to market changes,” he said. “The reality is, except for a few extreme situations like COVID, I don’t see them staying in the market that long.”
Although micro-condos sell for less than a similar but possibly more spacious one-bedroom condo, those who manage to buy a micro-unit often pay more than full-size condos.
“Small units tend to have the highest price per square foot in the building,” Hartree-Hallifax said. “A normal unit, the average is around $1,200 a square foot now. I see a lot of smaller micro units costing between $1500, $1600 per square foot, so on a price per square foot basis the developer can earn more if they can fit in more units.
Year-to-date, 110 micro units have sold in the GTA, with an average price per square foot of $1,452, according to data aggregated by Strata.ca.
Smaller and smaller unit projects seem to be popping up in pre-construction sales across the city. And while pre-build prices tend to be a bit higher than what’s on the market right now, some micro-unit prices are pretty shocking. At the upcoming 55 Charles Street Condos, the price list advertises a 335 square foot unit on the 50th floor for $942,900. And inside a planned 52-story tower at 252 Church Street, a 293-square-foot studio is on offer starting at $542,000.
“It’s hard to say, like how small can you get, isn’t it?” said Ettinger. “I think that’s the most important thing. I don’t think we would have ever imagined the bedrooms were under 450 square feet – even some new twin beds are under 600 square feet. ”
Meredith notes, however, that the buyer of a micro condo, even in the heart of downtown Toronto, will have difficulty getting a mortgage if the lender determines that the price the buyer wants to pay does not match the value. of the unit.
“Lenders have to be confident in the value, so if someone buys, say, with less than 20% down payment, which means they have to have CMHC insurance, then CMHC will be the one to confirm. value,” Meredith said. “They will look at comparable sales in the area to determine if they are buying a condo that is really worth that much money. If the appraisal is low, the buyer will have to make up the difference between the purchase price and the appraised value. So what happens is their down payment is now based on appraised value. If they offer, say, 10%, that 10% is based on the lowest appraised value, then they have to find an additional difference between the purchase price and the appraised value. »
So where are first-time buyers actually buying? And how?
With the deterrence from navigating the tricky landscape that securing a mortgage for a smaller unit can be, combined with a desire for more space, first-time buyers are turning away from newer buildings.
“All of my clients who have had lower budgets, like entry-level budgets for a condo, would prefer an older building or a less desirable building with more space than a studio,” Ettinger said.
Even still, many first-time buyers, especially younger buyers, cannot afford to purchase a condo of any age on their own.
READ: 40% of young Ontario homeowners received financial help from their parents
“I work with a lot of first-time buyers, and especially those expecting to live there, they’re looking for something over 500 square feet,” Hartree Hallifax said. “The reality is that most of them receive investments from their parents. And the way I’ve had it explained to me by different parents is basically, “We’re comfortable, we’ve got our property, it’s paying off, it’s worth a lot, we’ve got decent jobs, and our kids are going to inherit it. “. money at some point, so we’d rather they build equity and not have to rent, so we don’t mind putting that $100,000 in for them to start. Obviously, not every family is able to do this, but certainly those who own property in Toronto are.