Real Estate: Condo Flaws ( Part 1 )
A few months ago a brand-new condo owner in Toronto’s sexy distiller district saw her balcony explode. Seconds later hunks of tempered glass were raining down on the hopelessly-trendy streets below. Hours later a city building inspector ordered the property maintenance company to replace the glass – with more of the same glass. Duh. Days later City Council passed a motion forcing buildings to be checked for kamikaze suicidal balconies and come up with a long-term solution.
Add one more nail to the condo coffin. Do all those new owners have any idea where this is headed?
“Tempered glass is the standard of the industry,” a spokesman for the developer said at the time. “ It’s been that way for 23 years. It’s come off buildings in the past but it’s never been a newsworthy event.”
Well, times have changed. And the issue is not just acres and acres of glass cladding scores of Toronto high-rises. It’s also glass-wall construction with short-life seals, questionable quality cement, slap-dab plastic tube piping, plus condensation and mold. Not just Toronto, either. In recent weeks condo owners in Alberta have made headlines complaining about deck drainage mistakes, windows set improperly, leaking roofs and wafer-thin stucco.
As Calgary architect Tang Lee says, “It’s not going to fail in the first couple years, but it will fail five, 10 years, 15 years down the line.”
Why is this happening, and what does it mean for the broader real estate market?
Demand for multi-unit housing – condos – has never in history been higher. Right now Canada’s the condo capital of the world, with Toronto its epicentre. The reason’s simple: cheap money and lax lending standards pushed real estate prices past the point of affordability. A generation ago young couples would buy ‘starter homes’ – 900-square-foot bungalows on suburban lots. Today those places can command a half million dollars or more, forcing first-time buyers into boxes in the sky.
As a result, there are now 55,000 new condos under construction in the GTA alone, and another 31,000 being marketed and sold. But the construction industry can’t keep pace, turning out only 15,000 units in 2012 – and doing that at a breakneck pace leading inevitably to shortcuts and efficiencies. Meanwhile as sales slow, banks exit financing and prices ratchet back, developers find their margins thinning. Wouldn’t you want to cut a few corners?
So not only are purchasers waiting a long time – as much as four years or more – to get what they paid for, they’re often buying into buildings which could deliver some nasty surprises. Replacing the glass skin on a 35-storey tower, for example, could take a year and cost several million dollars – with every penny coming out of condo fees and special assessments against the owners. If they chose not to pay, they’ll face legal action, and be unable to sell their units until it’s resolved.
How many of those property virgins, shunting into their mortgaged 500 square feet, know that ?
According to a new survey this week, not many. When TD asked condomaniacs in Toronto, Montreal, Calgary and Vancouver about condo (strata) fees, almost 70% said they had no idea these things could actually go up. And they certainly can, especially if you move into a new building with no history of establishing reserves against major work.
Scarier still, the bank found about 40% say they “have no confidence” they could actually afford to pay an increase in those monthly charges. Note: that is any hike in fees, let alone a bill for ten or twenty thousand dollars that could arrive in five years when the glass goes Bruce Willis or the parking garage starts leaking.
This is what happens when people without savings, investments or actual money are allowed to buy high-rise units they should actually be renting. Human nature, greed and naiveté being what they are, most of these kids (and amateur investors) mortgage to the max, leaving nothing in reserve. If you were worried what might occur in two or three years when mortgages reset at higher levels, the news that four in ten can’t afford $30 more a month in condo fees should terrify. Especially given the trendy junk they’re moving into.
It seems certain the rush into these cement rabbit warrens will look like a poor decision in the years to come. A lot of people are on the verge of losing all their equity, first to Mr. Market, then to the hype and avarice which led them there.
Exploding balconies we could probably handle. Imploding virgins, not so much.
Another good incisive post by Garth Turner.
ANECDOTE: A family member has lived for approx. 6 years in a Richmond condo built in 1986. Since then, they have had close to $100,000 as THEIR share of major repairs and retrofits. They had the leaky condo issue ( $5 million to do the entire complex )…and as we speak the entire 80 units building is have its interior water lines replaced.
Ironically, they have small tempered glass panels on their balcony railing…and one day one of them e-x-p-l-o-d-e-d ie the glass simply shatters …apparently, according to the repairman , this is due to thermal shock, not due to anything striking it.
Now, I have always liked their building, I think it was well constructed and the architecture and design is quite nice. However, with strata , we are talking literally a night and day difference between this and Single Family Housing. In strata your living unit is attached to common property, ie hallways , roofs, walls. Your legal and financial etc. responsibilities extend to cover these as well in a pro – rata share sense.
Thus… strata is a money pit….there is always something that requires repair and maintenance, as well as minimum contingency funds. Now we have more legislation that requires stratas to engage in more paperwork ( and cost re: DEPRECIATION REPORTS
The changes means that every strata corporation will have to file a “depreciation report” every three years, outlining the current conditions and of the strata building, and also file and continually update a 30-year budget for repair, maintenance and upgrades. The first depreciation reports must be filed by the end of 2013.
“The government is trying to clean up the on-going upgrade, repair, maintenance process in B.C. [residential] stratas,” Hamilton said, “it is for consumer protection.”
The changes could raise strata fees, he added, as strata corporations pay to prepare and update the reports, which could run as high as $50,000 for a large condominium building.
The SFH owners can delay / defer repair and maintenance via being the sole owner thus at their sole initiative and budgetary discretion.
Stratas may increase in value if the overall Real Estate Market is booming, but in general they are a depreciating asset. In fact, some of the original ones have become such money pits, the owners have actually voted to sell their entire strata to developers , who demolish them and build new units.
The aforementioned is simply normal…a given…..UNavoidable over time. When UNexpected things happen, the strata (and its individual owners) becomes further indebted. The internal politics amongst strata owners can be very VERY ugly .
Demographically, stratas in BC have been around since the 1960’s, and many of the current owners are retirees who have owned SFH. Now, we have this whole new demographic of Pre – Sale buyers, many young ” Real Estate virgins ” who unfortunately swallowed the Kool – Aid.
( To Be Continued )