Are new condos overvalued compared to resale units?

Let’s compare GTA prices for both new and resale condominiums and see what the gap looks like.

Back in January 2004, the price of a new condominium stood at $254,409, according to RealNet’s monthly New High Rise Home index. At the same time Toronto Real Estate Board (TREB) figures showed that the median price of a resale condo stood at $185,000. The difference between the new and resale prices was almost $70,000.

Nearly eight years later, as of Sept. 30, 2011, the RealNet index was at a near-record high of $444,378 (up 75 per cent from 2004). The TREB median price of a resale condo stood at $310,000 (up 68 per cent).

This means the price gap between the new and resale condominiums has grown to almost $134,000, nearly double the price difference that existed back in 2004.

Given this almost doubling of the price gap between new and resale condominiums, it might be tempting to simply conclude that new condos are “overvalued.”

However, before you make that call first take a step back and think about what the data actually shows. There is an important difference in timing here that needs to be understood.

First, consider the monthly median resale price of condos. Approximately 250,000 condominium units were built in the GTA from 1970 to this year. Each month, an average of between 1,000 and 2,000 of those units are sold. TREB calculates the statistical median (middle) price of the units sold that month. The median resale price is calculated based on the transactions involving real properties.

Now consider the RealNet monthly New High Rise Home index. This is effectively a futures contract price for condos. Each dot on the index price line is driven by a universe of some 15,000 “futures contracts” — condo units that are mostly in pre-construction or under construction. These condos do not actually exist yet but will exist sometime in the future.

RealNet researches and inspects all new condominium projects monthly and calculates the official new home and condo price index.

This index price for new condominiums applies to real estate that does not exist yet but will exist in the future. So to get a better understanding of new condo pricing from a futures perspective, you can time-adjust the RealNet index price by four years — the approximate time it takes for a new condominium project to go from pre-sale to final closing.

Doing this shows that average new condominium price, time-adjusted four years forward, line up very closely with the median resale condo price, with only a small premium added.

Considering that GTA developers are delivering 15,000 units per year of new, more valuable and more expensive condominium real estate to the universe of 250,000 older condominiums, the median resale price will likely continue to get pushed up over time.

So are new condominium prices overvalued in comparison to resale condos? The answer is no. Always take an informed approach. First, make sure you understand the data, then make your call.

While the RealNet index price is often used to measure changes in new condominium pricing on a monthly basis, it can also offer an effective way to predict where resale pricing is headed in the future.